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Editor’s note

‘B’ for banking and big business
It is extremely difficult, if not impossible, to discuss country’s banking scene by ignoring the plight of the overall state of its economy. But the problem does not end here. Any analysis of macroeconomic indicators will surely lead to an assessment of the political scene mainly because of the fact that Canadian cleric Dr Tahirul Qadri’s protest had threatened to destabilize this country as it inches towards what would be the first democratic transition of power between two civilian governments through a general election due in May this year. Finally, sanity gained ground on both sides, leading to an end to this protracted dangerous stalemate after 5 nights and 4 days. It is during these turbulent days that the Karachi Stock Exchange, its premier bourse, shed 525 points in a single day due to uncertainty that had deepened on account of the Supreme Court order for the arrest of the then minister of water and power, and now prime minister, Raja Pervez Ashraf, in the rental power case. That banking does play a highly important role in the fiscal management of a developing country is a strong reality that has arguably found its best expression in Pakistan. For example, banking industry has acquired a new role through Tax Laws Amendment Bill 2012 that seeks to empower it to document unregistered individuals by issuing National Tax Numbers to them and accepting their declarations and investment schemes. The other body that has been entrusted with a similar task is the National Database and Registration Authority (Nadra). There is no denying that Pakistan’s banking sector has shown a lot of resilience over the past many years. It emerged unscathed when the world was hit by the financial meltdown in 2008. This was made possible because of its less than significant global exposure and resultant integration. Nevertheless, banking in Pakistan is quite mature in terms of supply and product range, including Shariah-compliant products. This sector has clean, strong and transparent balance sheets relative to some other banks in comparable economies in the world. It is interesting to note that in Pakistan’s context it is generally believed that although the banking industry is highly profitable, a number of banks are in trouble and their existence may be under threat. These are small and medium sized banks. This category of banks is said to be still facing acute problems in mobilising deposits and are struggling to meet the minimum capital requirement set by the State Bank. Banks have made slow progress in electronic payments. Entry of cellular companies in telebanking has been quite spectacular and as much as nine percent of payments are settled through mobile phones whose penetration is said to be over 60 million in a population of 180 million. Although, in recent times we have seen a proliferation of banks, some of them are under-capitalized, poorly managed with a scanty distribution network. Agriculture, small and medium enterprises, housing sectors are underserved and the middle class and low income groups have limited access to credit. Moreover, banks have been accused of focusing on trade and corporate financing with a narrow range of products. They are criticized for their lack of will to diversify into consumer and mortgage financing for which there is ample unsatisfied demand and last, but not least, they are accused of suffering from poor quality of human resources, weak internal controls, non-merit based recruitments, high administrative costs and undue interference of unions in their decisions making process affecting the performance of public sector financial institutions adversely. The country’s economy is coping with a protracted period of stagnation mainly because of a consistently low level of credit availed by the private sector together with declining foreign investments. The question that even a 400 basis points reduction in interest rates over the past 17 months has failed to whet the private sector’s appetite remains partly answered. The oft-repeated, if not entirely profound, reasons are chronic energy shortages that have caused considerable adverse impact on the utilization of productive capacity within the economy and a serious law and order situation that generally deters any established or prospective investor from entering or introducing new ventures or expanding the existing business base. The upcoming general election will be a period of wait-and -see because businesses would wait for things crystallize before they take prudent decisions. The two prime casualties of the situation are productivity and jobs. The latter in turn tends to exacerbate social tensions while the former gives birth to an environment in which efforts aimed at achieving revenue collection targets are fraught with uncertainty and hopelessness. The Banking sector is also required to pay attention to the SME sector that it truly deserves. The argument often advanced by some top banks that the SME sector does not have the capacity to borrow beyond a certain limit and service it accordingly, is only a strong reflection of the banks’ reluctance to develop a more robust and focused strategy towards meeting the needs of SMEs. It is time that the banks took certain initiatives to enhance their lending to this sector that will be in the interest of both; the banks and the economy. We must not lose sight of the fact that SMEs play a highly important role in the economic development of the country. The SBP governor, Yaseen Anwar, too has underscored this need. According to him, this sector makes a highly significant contribution towards economic growth (GDP) while providing employment to 70 percent of non-agriculture workforce and generating 25 percent in export earnings. It is unfortunate that heavy domestic borrowing by the government is crowding out private sector credit with negative implications on growth. Although the private sector remains the engine of growth, the bulk of bank credit is channeled into unproductive government subsidies leaving little for trade and industry. That the government offers banks an absolutely safe and secure deal because every penny that it borrows is backed by a sovereign guarantee is not a wholly plausible reason for the banking sector to abdicate its responsibility towards the private sector where incidence of NPLs is unfortunately quite high. The government’s over-reliance on the financial sector cannot be limitless. In the developed world, financial markets are as much as 200 percent or even more of the GDP - while in Pakistan it is less than 30 percent of GDP. Consequently, the government will need to print more money if it does not halve its budgetary deficit from its present level of over 7 percent of GDP. Although, the need for financial viability of banks and their various schemes is widely acknowledged, nonetheless this sector is required to take some concrete steps towards removing the widely-held perception that the interests of the poorer sections and as well as those of the common man are ignored. Broadly speaking, banks in Pakistan have a bright future because even most of the new entrants have established themselves in the system and have set new standards of service and efficiency. Dear readers, this Banking Review by Business Recorder is an effort aimed at providing you with an insight into this highly important sector with a view to strongly stressing the point that while this sector has been important, it is going to be even more important in the future. Enjoy!

BANKING REVIEW 2012 / January 28, 2013

Page 03

Ali Khizar Aslam
Head of Research

Mobin Nasir

Asst. Editor Research


Banking Review 2012

Monday, January 28, 2013 |

Zuhair Abbasi

Senior Research Analyst

Sijal Fawad

Research Analyst

Hammad Haider
Research Analyst

Sidra Farrukh
Research Analyst

Javeria Ansar
Research Analyst

Sobia Muhammad Saleem
Research Analyst

Naseem Waheed
Database Officer

Abdul Musawer Gulzar
Creative Designer

Murtaza Khaliq
Creative Head

However. So how are the country’s banks adjusting to this emerging reality? BANKING REVIEW 2012 / January 28. The State Bank of Pakistan (SBP) has done well to use market-oriented solutions to push the banks along their primary role of financial intermediation. diminishing writ of the law and swelling parallel economy will likely remain hurdles to financial inclusion. As a result. The continuity of the high profit regime for the banking sector has been exposed by lower interest rates and rising ceiling on deposits rates. If half of that money is bought back to the formal financial system. 2013 Page 05 . lethargy on building energy infrastructure. Whats more. Further. But history suggests that the downward trend in interest rates may be a short journey. while few companies from textile and other corporate sectors may step into the contest as economic opportunities emerge for them. Government borrowing from scheduled banks is unlikely to take a breather. the sour taste of non-performing loans is still keeping banks’ appetite ow for lending to SME’s and consumers. the deposits-to-GDP ratio will be comparable to that in India. Currency in circulation is close to one-third of the overall monetary assets and that has substantially increased in this regime.2013: HERE COMES A TOUGH ONE! Ali Khizar Cost cutting seems to be the strategy rather than looking for innovative out-of-the-box solutions. Bankers beware! 2013 is going to be a tough trough for banks’ top-line revenues amidst falling interest rates and squeezed spreads. conditions have worsened over the last five years as the transfer of income from urban to rural areas has also led to higher flow of funds into the grey economy. to date only 10-15 percent of the population have entered the formal financial system while the overwhelming majority continue to rely on informal lenders. Other developing countries have raced past these levels in recent years. Bank deposits are a mere one-third of the size of the economy (GDP).

in 2013.Given the velocity of 2. may be in the offing on this front. The commercial banks have become increasingly focused on lowering the cost of deposits and lending to the Government to beef up the bottom line. Virtually all the trade is taking place in short-term Government paper. The development of a long-term yield curve is crucial to bolstering long-term private sector lending in the Country. By bringing in investment banks as competitors to commercial banks in the debt market. Bankers have ratcheted up efforts to speed up banking court cases and there are reasons to believe a change market-oriented reforms that drive banks to lend to the private sector. banking deposits would increase by half from Rs6 trillion to Rs8. which was 22. As far as SME lending constraints are concerned. the persistent pressure brought on by the high fiscal deficit and Balance of Payments vulnerabilities may soon give wind to simmering calls for a tighter Monetary Policy. The reminiscence of boom of the last decade could turn to reality by bringing this liquidity back to the system. are all hurdles that need to be addressed.khizar@br-mail. but it will not help much in bringing the unbanked into the formal financial fold. Capital formation can boost formal savings. Lending rates could easily be in the vicinity of low. But in the absence of market-oriented policy reforms this seems like a romance on a rainy December day. skewed banking recovery laws. Presidents and senior management of banks appear fixated with cost cutting through work force rationalization and reducing the number of branches. He can be reached at: ali. The reforms needed to spur banks away from lazy banking mandate concerted efforts from the SBP. working capital as well as consumer products like house. Outstanding TFCs are worth less then a hundred billion rupees while Government Treasury Bills are floating in trillions of rupees. The investment to GDP ratio is at the lowest ebb of 12.5-9 trillion. Whatever corporate debt market was there in the form of TFCs is diminishing in the aftermath of the 2008 financial crisis.5-3x. high foreclosure and documentation requirements. That would mean lights out for efforts to bring the unbanked to the formal financial system.5 percent of GDP in FY12 (provisional). The Government would do well to issue Pakistan Investment Bonds (PIBs). After all. the Securities and Exchange Commission of Pakistan and the Government.The debt market is small and confined to a few banks’ treasuries with a sprinkling of participation by mutual funds.6 percent of GDP in FY08. car and personal loans. As far as SME lending constraints are concerned. the regulator should push banks to develop de-centralized models whereby relationships are inculcated with businesses and facilities are offered based on the banks’ experience with individual Page 06 BANKING REVIEW 2012 / January 28. the regulator should push banks to develop de-centralized models whereby relationships are inculcated with businesses and facilities are offered based on the banks’ experience with individual clients. at longer maturities instead of over-reliance on T-bills. low capacity of courts and poor law enforcement. Such a move would lower the The writer is Head of Research at Business Recorder. bring ample room for private sector to borrow from banks and churn the wheels of the economy. Barring such reforms. to develop a long-term yield curve. This can make our fiscal debt sustainable. single digits with adequate credit for long-term investments. revamp recovery laws and come up with cost for the issuer (Government) while also providing borrowers an alternative to bank deposits. prudent regulations. For that to happen. banks. the latter can be pushed to play more effective roles as financial intermediaries. banks’ profits will again rise on the back of lazy banking. 2013 . Once that happens. driving financial inclusion in the Country would remain a distant dream.

MCB BR Research: None of the bigger banks seems willing to swallow any of the smaller banks. not just in the banking courts but in all other courts of law as well. 2013 Page 07 . There’s something wrong here. The banks will have to sweat a little bit. would you be willing to take over a small bank? Mian Mansha: We want to take over some banks but we are not allowed to do that. The businesses we’re going into – a shopping mall. In Sri Lanka. or even mergers between smaller banks and bigger banks so that they can reduce cost and provide better deals to borrowers and depositors. By not taking any measures on this end. while we see that as a challenge. Minimum deposit rates should be reduced or eliminated. though. the security issue continues to plague the economy. You yourself run a big bank. wilful and otherwise. the change will come – because you cannot continue to charge people 20-25 percent interest rates on credit cards and expect them to pay you. The central bank should also have adjusted its floor on return on deposits in line with the 300 bps reduction in the discount rate. Citibank was the same story. But businesses cannot control lawlessness. However. the banks need to cut their costs. Then even HSBC did not work out. In our own group. this impetus has not kicked in yet despite lower interest rates. I welcome a reduction in interest rates. And in the South. the discount rate has dropped too much and too quickly. Profitability of banks will be impacted by lower rates. That must be one of the nastiest experiences. They were leaving. and the opportunity also seemed ripe. the banks will automatically begin developing housing schemes to fuel growth in the sector. there is a law for mortgages under which any person that does not pay three or four monthly installments. so they seemed to be a good target. I have my sympathy with someone who has his house possessed. there is this divide between the North and the South. certain segments of the market aren’t profitable anymore and people are withdrawing from these segments.Small banks should actively seek mergers Mian Mohammad Mansha | Chairman. We are currently the most profitable Bank in Pakistan.000 people globally. But in my opinion. BRR: SBP has cut rates significantly over the course of CY12. One can set up one’s own alternate source of energy or incorporate the risk into their cost consideration and required return. we are trying to expand. particularly in Karachi. but the best days of banking profits and telecommunications industry profit are gone. Look at this one consideration: the top neurosurgeon in the world probably makes less money than a 30-year old investment banker at Goldmann Sachs. Recently. But you also have to consider the fact that an entire sector is losing out on a development opportunity. All these banks have moved out of Pakistan so they seemed to be the right target. In Pakistan. How do you view these cuts and how can banks fare well in a situation where spreads are narrowing? MM: Interest rates should come down and that is the right approach by the apex regulator for spurring economic growth. that are running off from consumer banking. You need the housing sector to develop. The banks that are stuck in litigation for years on end should be facilitated by speeding up the judicial process. The energy crisis may be controlled by entrepreneurial drive. SBP has exposed the smaller banks to very tough conditions. and so prospective investors often cannot arrange the necessary finances to take on such projects. I have my qualms about small banks being successful and niche players. and we are busy with our internal considerations as a lot needs to be done within our own bank. BANKING REVIEW 2012 / January 28. We aren’t in any hurry. I feel that there should be mergers between smaller banks. it is quite difficult for banks to offer a mass-market product without being flooded with defaults. So. But with regards to those foreign banks. and a dairy business in Lahore – require minimal usage of energy. We simply cannot afford to put the brakes on such a vital sector of the economy. In general. New York and even here. public pressure can also play a big part in driving reforms that aim at providing speedy justice. the smaller banks should look for mergers among themselves or with the bigger banks. Citibank announced a reduction of another 11. The real estate and housing sectors drive dozens of other industries which in turn provide hundreds of thousands of jobs. are the current laws regarding bankruptcy and recovery of loans an impediment to banks’ expansion in these market segments? MM: In the absence of any security or collateral against the loans given out for the purchase of a car or a house. we are also cognizant of the fact that this is necessary for a stimulus to the economy. The North has no energy. two hotels. Therefore. The central bank should also have adjusted its floor on return on deposits in line with the 300 bps reduction in the discount rate. Despite all of our work on biofuels. In my opinion. The name of the game is business and I believe that there are some serious issues with smaller banks. But more importantly. You change the laws and provide tax relief on housing sector investments. BRR: Banks are hesitant to expand their consumer lending portfolios in the Country. INTERVIEW BY: ALI KHIZAR The discount rate has dropped too much and too quickly. First of all. Unfortunately. but the change is coming: With the number of people in London. first the RBS bid didn’t go through. And this is not just limited to our bid for the foreign banks. very little investment is being channeled towards the development of real estate simply because the banks are not able to lend without adequate security or collateral. automatically loses possession of that property which is seized by the lending institution. we cannot afford the risk emanating from the energy sector. The issues limiting economic activity are diverse and not entirely curable through a rate cut. we will have to wait for results of past mergers as these things take time. In your opinion.

Revamp laws to revive consumer and mortgage lending Atif Bokhari | President United Bank Limited BR Research: Falling rates are bringing back memories of 2001. Some people say we can manage it by improving our collaterals but the point remains that if it cannot affect realization of that collateral in case of a default. and nothing has happened since. just do not want to put up new money. Going forward with this low interest rate scenario. The liability side of the banking system is not an issue as deposits are still growing at a decent double-digit rate. On the other hand. BRR: The country’s industrial sector has not graduated beyond light engineering as witnessed in China and India in the recent past. It will eventually come back to the system. How would you respond to this criticism? AB: The environment is such that it does not create innovation. but that pushes up the cost of acquisition to an unaffordable and unscalable level. We added 85 branches last year and are expected to add around 45-50 this year. So far only small portfolios with very tight cost controls have worked for the banks. when cost of credit was low yet demand was mute. Such firms have an appetite for working capital requirements. BRR: Informal lenders charge high rates. BRR: In your view. the interest rate regime may well be in favour of aggressive lending. there is no demand for private sector credit because of a variety of reasons. People do not see enough business opportunities in terms of investment.000 agents. The election itself will not create any productive assets. law and order is fleeting. will falling interest rates revive consumer lending? AB: The real problem on this front is the culture of non-payment. it will be a good number. But today. Because to breakeven. BRR: How rapidly have you added to your branch network over the years? There is no transition in Pakistan from low income to middle income group. Moreover. Omni has been a roaring success. Would you agree? Atif Bokhari: Theoretically. this is not the case anymore. law and order is the other. we do almost three million transactions a month through 7. Even when banks win a decree. Besides the gas and electricity crises. I will give you the example of KSBL. BRR: Banks have been criticised for lack of innovation in lending. If the status quo remains. The energy crisis is one reason. 2013 . even if we retain half of them for the next six months. We agreed on a certain draft earlier but this has now been completely changed heavily in favour of the borrower. as we did not want to dilute the standard. what are the main hurdles to this evolution? AB: A lack of managerial competence and corporate governance are the two AB: It has been more of a sporadic growth. The capacity has not increased that much. then there is no point in structuring your collaterals. yet they are well entrenched. There are only a handful of quality business schools for a nation of more than 180 million people. The last hearing over the Recovery Law was held in April 2011 by the Supreme Court of Pakistan. people key reasons hindering industrial advancements. so there is not much room for people to invest and save. even if we retain half of them for the next six months. Omni has been a roaring success. which we are not going to accept in any case. It is very easy to park your money in real estate. The problem lies on the asset side. It is a worldwide phenomenon that real estate prices go up in a declining interest rate scenario. but deposit generation is not the issue. BRR: What amendments do you propose to the existing laws to improve the judicial system with regard to banking disputes? AB: There was a Corporate Rehabilitation Act that was introduced and is still biting dust. I do not expect any aggressive growth in the branch network across the industry. with the kind of spreads that we have at the moment.000 virgin accounts every month. where we planned to launch with 60 students. but we ended up having 40. getting it enforced is another uphill battle. Big multinationals used to be a good training grounds for graduates but giving the lack of new investments. the training ground is no longer available. which is also a big issue. So this is the state of education where we cannot even find 60 good students for a graduate program.000 virgin accounts every month. In your view. Why are the banks unable to tap this demand? AB: The legal system is simply not conducive for the banks. UBL OPENED 85 in CY11 Page 08 BRANCHES INTERVIEW BY: ALI KHIZAR AND ZUHAIR ABBASI BANKING REVIEW 2012 / January 28. UBL ADDED NEW BRANCHES in CY12 50 We are opening 350. but not much beyond that. The SME sector doesnt have the capacity to take on more credit and service it while adding infrastructure. the mortgage market will never develop in this country. which is why all the money is going into real estate. without the consultation of the financial sector. you will have to create a lot more liability. But we are conducting awareness drives to educated people on the virtues of savings. BRR: Is banking penetration increasing at a mentionable pace in the country? AB: Yes. it will be a good number.000 agents. Secondly. BRR: Do you expect the upcoming general election to generate demand from spending on projects? AB: I think everyone will adopt a wait-and-see policy before embarking on new projects or expanding the current ones. One will have to be suicidal to go out and start lending in today’s circumstances. we do almost three million transactions a month through 7. it will merely be circulation of money in the system. large corporations have also not seen any significant capacity expansion in the past few years. We are opening 350. the legal system itself is an obstacle to innovation and lastly. and it will only keep on increasing. They would rather go and invest in real estate.

5% 57.4% 57.8% 22. However in Khyber Pakhtunkhwa.6% 12. and a similar portion of total investments in Government debt. respectively.2% 4. mid-sized banks have a 22.6% 59. hunting and forestry Manufacturing Textiles Chemicals and chemical products Electricity. The growth in banks’ advances has been left in the dust of galloping deposits.8% 4.6% 4.5% 7. there will be no such partnerships. i. but inflation adjustment shows real growth in the past four years has barely managed to serve existing working capital requirements of the private PRIVATE SECTOR CREDIT SHARE Agriculture. Sindh Bank which was created to boost access to the financial system for residents of rural areas.4% 4.3% 57. The banks were even bigger scrooges in Balochistan.8% 23.7 percent share in total deposits. renting and business activities Personal Source: SBP Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Nov-12 8.3% 4. Overall advances expanded by 15 percent between CY08 and CY12. which has nosedived to 52. The cash-strapped Government of Pakistan has repeatedly touted Public-Private Partnerships as the best available option to drive economic activity and development.5% 4. Federally Administered Tribal Areas and Azad Jammu and Kashmir has thinned. In case you misinterpret this to mean there are no business opportunities in Balochistan.Following the money trail Mobin Nasir and Zuhair Abbasi As financial intermediaries.6% 4. It is for the Government and central bank to understand that unless credit starts to reach businesses and people. On the other hand.5% 11. the growth in advances in Rs9 against every Rs100 in desposits generated from that province.1% 21. the electricity and gas supply.9% 7. Banks‘ advances to the private sector in the past five years have grown at a cumulative average of just 2. Most of the fresh credit has unfortunately gone to.4% 58. leaving only Rs400 billion or 15 percent of additional deposits created to be lent to the private sector.5 percent and 17.e.5% 4. This pales in comparison to the deposit growth during the same period. have grown at a 5-year CAGR of 24. During this period. unaffordable and causing a great deal of inconvenience. the gap between deposits and advances has worsened and this chasm has been filled by investments in Government debt.7% 6.4% 8. frail law and order and political uncertainty.7 percent. The writer is Research Analyst at Business Recorder. which clocked in at 12. a massive 85 percent were invested in Government paper. outpacing the growth in investments.6% 7. The huge pile of circular debt due to the crippling energy crisis has led to increased short-term borrowing requirements for the energy sector.1% 8.4% 3. 2013 Page 09 . lending just When quizzed over the weak proportion of advances. In the past five years.4% 5. making the sector the second largest private sector borrower after the textile industry.6% 22.5% 6. besides a dozen outlets in major cities like Lahore and Islamabad. In Pakistan.8% 2. respectively.1% 8.5% 23. banks are the conveyor belt that channels funds from savers to prospective borrowers so that the money accumulated by the nation and its businesses can be used to expand economic activity and provide the foundation for growth in the future. respectively. while throngs of SMEs and individual borrowers in the metaphorical waiting lounge wait endlessley to get a share of bank loans. the advance to deposit ratio (ADR) stands at a healthy level of 63 percent and 72 percent. from as high as 75.5 percent as at June 2012.2% 58. Of the Rs2. Studies conducted by the State Bank of Pakistan concede the disbursement of credit in rural areas has been mostly confined to agricultural credit and deposit mobilization for wealthy land owners The writer works as Asst Editor-BR Research.0% 4. Banks’ investments in Government securities. the latest report of the Global Entrepreneurship Monitor (GEM) in January 2013.4 percent. the business model deployed here is barely different from any of the other scheduled banks. despite their rising proportion in total deposits with the banking sector. most bankers point to the energy crisis. storage and communications Real estate.6% 11.0% 11. has also amassed close to 40 branches in Karachi.5% 6.9% Punjab and Sindh clocked in at 15.7 percent.5% 3.1% 26.4% 28.9% 20. inappropriate.5% 3. has highlighted that Balochistan has the highest proportion of entrepreneurs in the entire country.1% 11. Regional break-up of advances and deposits shows an even bleaker trend.585 billion additional deposits created during CY08 and CY12. Banks’ advances to the private sector have grown.2% 1.2 percent in CY08. the least desirable sector with the least desirable usage.3% 11.4% 12. Khyber Pakhtunkhwa. Such massive reversal in deposit utilisation trend explains the deteriorating ADR.25 percent.6% 3.0% 3. Statistics may not tell the whole story but surely they do not lie.2% 8.0% 17. He can be reached at: m.4% 4. Khyber Pakhtunkhwa and Balochistan saw advances shrink by seven percent and 16 percent. To put things in perspective.1% 23.9% 4. The advances growth for the period was a handsome 24 percent. On the other hand. The Big Five Banks have led private sector lending as 71 percent of the total advances are attributable to them although their share in deposits is lower (53 percent). percent.4% 3.3% 6. The story of commerce and trade sector is not any different as its share in private sector credit has fallen down to single digits at 8.9% 9. the five-year period prior to CY08 saw an 18 percent cumulative average growth in deposits. The services provided in rural areas have been inadequate as well as inconvenient. contending there are few opportunities for extending private sector credit. unsafe. whcih clocked in at a steady 10 BANKING REVIEW 2012 / January 28. Government policy with respect to financial inclusion is either ineffective or missing.3% 7.5% 7.abbasi@gmail. against 13 percent in CY06. manufacturing sector is the largest recipient of bank credit with 56 percent share in private sector credit. In Punjab and Sindh.2% 4.6% 4. where credit disbursement to the private sector in Balochistan. He can be reached at mmobinn@gmail. only Rs13 were lent out for every Rs100 in deposits. The situation is similar in other provinces. Arguably. Looking across industries.8% 14.0% 7.6% 4.0% 10. gas and water supply Construction Commerce and Trade Transport.4% 9.zuhair. this conveyor belt seems eternally wedged in the VIP section filled with Government and few large corporates.6% 8.4% 55.0% 13.5% 2.6 percent as of November 2012.9% 2. But the devil is in the details: lending to textile sector has dropped incessantly in the past six years. Scheduled banks cannot be blamed for concentrating branch networks where business prospects are brighter.

sugar and all other industries other than fertilizer which is facing a gas shortage. In my view. MPS alone will not change the economic environment. We feel that this is a good initiative. Standard Chartered Bank Pakistan is one of two private banks with a AAA local rating. Then the discount rate has trended downwards. planned outflows are in excess of $4 billion and in the absence of any inflows from CSF and other support mechanisms. BRR: Bank deposits are outpacing advances. are themselves conservative at the moment. as have mortgage loans. We monitor its growth in terms of its contribution to the overall revenues and in these terms it has registered remarkable improvements each year since its inception. What factors have contributed to this reduction? MN: This is among the most significant achievements of our staff. We are working on cracking the math to be able to tap the potential market that is not being covered comprehensively right now. Secondly. a lot of those watching from the sidelines will be compelled to invest here. Will this trend abate as interest rates come down? MN: All the big banks are sitting on large pools of excess liquidity at the moment. including cement. especially those who reach out to customers and bring clientele to the Bank. From this point on. BRR: SCBPL has reigned in its cost of funds quite well. creating room to lower the cost of funds. we know we can count on these clients for even more business. Our issuances of personal loans and credit cards have gone up. We have devised a host of strategies to attract and initiate people to internet banking but the growth we would like to see will take steady and concerted efforts in the medium-term. BRR: Banks opine that recovery laws act as detriments to banks’ appetite for private sector credit. Having said that. there are many foreign investors eyeing attractive valuations in Pakistan. many people that had previously been issued loans and cards by the banks. compared to the heyday in the early 2000s. wilful defaults will rise. I personally follow the cases that our Bank is pursuing and stay in regular consultation with our lawyers for this purpose. FMCGs. the fact is that credit demand is strong across sectors and corporate results are healthy. BRR: The Islamic banking window operation for SCBPL has gained a lot of momentum. STANDARD CHARTERED BANK PAKISTAN IS ONE OF TWO PRIVATE BANKS WITH A BRR: Why are SCBPL’s non-performing loans relatively high compared to other similar sized banks? MN: We are very conservative in our approach towards provisioning. But the industry is not back at the size it was at back in 2005. We do not take chances on that front. So from a risk perspective this is a very prudent approach. We are focussed on garnering clients since before rates started declining because when the economy rebounds.Cre Credit r dit demand is re strong s ro st r ng n across a ro ac ross oss sectors sect cto ct tors and corporate c rpora co rat ra ate te earnings n are ngs r healthy re hea e lthy ea h hy BR Research: SCBPL’s internet banking is a success story. We have a strong appetite and liquidity for these segments. Backlogs have been a persistent problem in the courts but banks too have to stay on top of these cases. even if advances grow at a steady pace. There are looming pressures on the Balance of Payments. The energy crisis has really driven up the cost of doing business and law and order is a detriment to expansion at the moment. In your view. a lot of uncertainty from exogenous factors will be relieved and then demand will continue to grow. how beneficial has this been for generating demand for credit and boosting economic activity? MN: SBP has taken an accommodative view over the past 12 months and it has also been very open in terms of communicating to the banks. Do you foresee a significant shift from branch to branchless banking? Mohsin Nathani: There has not been a fundamental shift to branchless banking. deposits are much more and growing at a rapid pace as well. Regardless of personal opinions. so that is another factor. BRR: State Bank of Pakistan has taken an accommodative view on Monetary Policy of late. At the same time. the clients whom banks are most eager to lend to. I feel that after the general election. So we feel that a more holistic approach is needed for a roaring revival. Its growth has been among the highest in the Islamic banks segment and we have also opened many new Islamic branches. The laws should be geared to allow a legitimate level of pressure and accountability against defaulters. Are there any plans to spin it off as a separate business? MN: Standard Chartered Sadiq is a success story for us. Standard Chartered Bank Pakistan restriction. BRR: Consumer lending has dried up considerably in Pakistan. The Islamic window has worked quite well for us. so there is no immediate plan to spin it off as a separate bank. Banks often make exceptions but it is important to have well-defined processes for applications for loans and credit cards. Mohsin Nathani Chief Executive. additional judges have been appointed to the superior courts in recent times and banks have also become timelier in the pursuit of legal recourse in instances where they encounter problems. it is a slow transition. textiles. industrial activity has picked up in the past 12 months. The business community had been urging the apex regulator to bring down loans and since the discount rate is benchmarked against inflation. there has been room to lower the policy rate. But now interest rates are trending down. not a demand AAA LOCAL RATING COVERAGE RA RAT IO RATIO IS CLOSE TO 80 PERCENT Page 10 INTERVIEW BY: ALI KHIZAR AND MOBIN NASIR BANKING REVIEW 2012 / January 28. Then we have kept a tight check on administrative costs even with high inflation. so that the baby is not tossed with the bath water. If the negativity over the country is subdued. The global economic recovery has also been slow and that is also a factor for relatively low demand for credit at home. Will that entice the banks to lend more in the consumer and retail segments? MN: We are focusing strongly on expanding the retail lending business. the rationale behind its approach. So ADRs for the industry are not likely to come down very quickly. In fact our coverage ratio depicts this conservatism as it is close to 80 percent. We have grown our book by Rs7-8 billion since 2011. However. After the creation of the Credit Bureau. are not qualified any more. 2013 . Do you consider this a capacity issue or do recovery laws need an overhaul? MN: Wherever the legal recourse is time consuming. which is weak at the moment. foreign exchange reserves will likely decline and the local currency will be under pressure. We differentiate between good costs and bad costs.


almost thrice the number of bank branches in the country. the branchless banking sector has emerged as the leading contender to bridge the financial divide Banking: a business of restraints and constraints Banking continues to remain a business that offers restricted access to the under-privileged social strata. banking sector penetration remains unimpressive to date. Growing competition will accelerate the pace of new financial services’ offerings under the BB umbrella. Service providers started with the provision of basic banking services like bill payments and funds transfer. the BB system would be like a computer without software – it just wouldn’t work. The intimidation felt by the users when they walk into banking structures of marble and concrete is also taken care of by these simple and “friendly” establishments. financial mainstreaming of the unbanked population may be a very difficult proposition in the brick-and-mortar retail banking model. Therefore. so their rapport and camaraderie encourage prospective users and suppliers to try out BB services. and it will also reduce cash-based transactions significantly. That’s where things are headed now! Page 12 BANKING REVIEW 2012 / January 28. 2013 . it will be a matter of time before the foundation rattles. while holding back on private sector lending. services marketing and quality assurance at the agents’ end are very important. It is crucial for the agents to remain consistent. while at the same time maintain their friendliness and educate the customers about service benefits and usage. In a country with over 100 million adults. Trends in Banks’ branchless interface Hammad Haider The writer is a Research Analyst at Business Recorder. banks in the country have preferred to hold on to Government securities to earn easy profits. Many of these outlets close late in the night and normally open early in the morning. He can be reached at hammadshah24@gmail. it will benefit the service providers in terms of float. Matters like liquidity management. It helps that Pakistan adopted a bank-led model for provision of BB services in 2008. BB agents are spread out across cities and towns of the country and are usually well entrenched in their communities. The retail agent network of the four service providers has now expanded to over 32. The total number of borrowers is a pygmy tally of 5. In three years’ time. But there is hope – a silent revolution is already in the works. The full-scale deployments of two established BB service providers. with over a billion rupees flowing through the system every day. In three years’ time.A silent revolution is already in the works. Official data indicates that over ten million transactions are now being generated every month in the BB system. middle class pockets and migrant white collar workers. If the agents are hired and are left on their own to operate with minimal training and supervision.Com Customer Interface with the branchless banking ecosystem The established BB service providers have largely focused on urban. Latest figures from the State Bank of Pakistan state there are 32 million bank accounts. In the past four years. Without quality interaction among agents and customers. have really pushed the financial inclusion envelope in Pakistan. Convenience complements this growing trust among consumers. meticulous and professional in their business conduct. independent estimates put the proportion of the unbanked population at a whopping 85 percent. Such a payment ecosystem will offer incentives for people to save and spend via mobile phones. which makes the BB services’ availability virtually a 24/7 affair. Further. the branchless banking sector has emerged as the leading contender to bridge the financial divide.7 million. thus paving way for comprehensive financial services in the future. Mobile wallets are expected to cross the two million mark any day now. which are reported have inculcated greater confidence in the system. in addition to two new arrivals. as more and more vendors start accepting payments via mobile wallets. of which 20 million are unique (meaning the remaining 12 million accounts belong to people with more than one account).000 agents. Service providers now understand the opportunity that the branchless banking platform can become a currency of sorts. The rapid adoption from the mid-tier should allow them to commercialize the service at the lower-tiers of the so-called market pyramid.

The bank’s flagship branch located in Gulberg Lahore and the seven premier centres spread across the country are a case in a changing financial landscape like Pakistan’s cannot be obtained thorough mobile banking alone.which has been a buzz word this year. it is essential that banks find ways to manage successful delivery channel integration and find the optimal mix of leveraging technology to enhance the branch experience for both the Y generation and those who prefer things the old BANKING REVIEW 2012 / January 28. While technology is set to be major enabler in transforming retail banking to reflect the changing economic environment of the country. children’s play areas and other exclusive services. While it has varied from bank to bank. Branch Banking: One size need not fit all Coming into its own. Looking to penetrate into smaller cities and market towns. But with the teller window concept having gone largely out of vogue. the branch banking eco system in Pakistan this year saw a two-fold shift wherein the foreign banks have largely focused on revamping their service delivery through the use of technology and innovation in business processes. accessibility remained a cornerstone for all branch expansion plans this year.sized local banks have been busy re-designing the dynamic and scope of their branch footprint across the country. the transformation of retail networks has been undertaken by a number of The writer is Research Analyst at BR Research. the overall dynamic in branch interface is all set to become leaner and meaner as banks set up a multi-channel approach towards service delivery. walking into a bank branch is a much less intimidating experience than the days of yore. The overall dynamic in branch interface is all set to become leaner and meaner as banks set up a multi-channel approach towards service delivery Catering to the top-tier customer. leaner branches in towns where the banking net is not well spread as yet. But unlike the unbridled expansion witnessed in the early 2000s. which have minimized the customer’s need to wait around in long queues. there is a greater need for closer exploration of the potential future role of the branch within the banking ecosystem. With margins squeezing incessantly. the brick and mortar banking storefront has also been given a much needed face lift in the outgoing year. Banking: At the cross-roads of immense possibilities As banks across the country put an increased focus on digital channels and sales outside branches. Today. banks today are much more focused on transforming the interaction that takes place between the bank and the customer. many banks have also consolidated their presence and cut branches. If anything. instead of creating a substantial geographical presence. local players also need to think outside the box in terms of their branch formats. it is imperative that banks come up with ways that can reduce the cost of this channel. Here it is important to re-iterate that the unbanked segment of Pakistani society remains unbanked for a reason. conference rooms. Services available on these self-service CDM terminals include credit card payments and cheque deposit to account apart from cash deposits. 2013 Page 13 . these centres offer dedicated relationship managers along with boasting facilities like cigar lounges. the complex morass of automated interaction that most deem our future is very likely to put them off for good. Moreover. The year also saw Standard Chartered flirting with branch re-design and automation which saw them setting up Cash Deposit Machines in 19 branches across the country. for a developing market like Pakistan where the largest segment of the unbanked is concentrated within the technology illiterate rural areas. namely their inability to understand and conquer the seemingly impenetrable maze of complex rules that govern the banking system. while the medium. banks in 2012. real and sustainable financial inclusion can only come trough finding the right mix of alternative channels combined with the more traditional forms of banking.Trends in Branch Banking Interface: 2012 Javeria Ansar Characterized by paradigm shifts that are re-moulding the shape of the financial service industry in the country. Therefore. For banks the likes of Barclays the focus has been on evolving the model and brand of service provision to the select clientele that the bank targets. real financial inclusion. when the Going forward. going for a value-added ‘branded’ customer engagement approach that leans away from mere “selling” towards a more holistic banking experience. On the other hand. for the more solution oriented banks like Soneri and Bank Alfalah. She can be reached at javeriaansar08@gmail. And all the talk of technology-enabled agility in the world is not going to make the ‘banking experience’ easier for them. impersonal brand of banking dispatched by taciturn tellers perched behind their Plexi-glass thrones could daunt the strongest of hearts. Ultimately. Plans for both banks include opening smaller. while the case of branchless banking remains strong.

BRR: What are the key impediments to the large-scale spread of mortgage financing in the Country? AB: The overall eco system for mortgage activity entails certain pre-requisites in order to be successful –some of these include the registration of properties. it is no surprise that mortgage financing has not witnessed upward momentum in the country. Similar to the rest of the industry. We intend to continue to lead the market in terms of consumer finance growth in the upcoming year. you can witness a shift towards providing consumer financing through branches – a concept markedly different when compared to the earlier centralized. Our deposits. Our bricks-and-mortar banking model coupled with our branchless banking services should bolster our efforts to introduce a larger proportion of the unbanked population to the formal fold. Atif Bajwa: The Bank has outpaced the industry in terms of private sector lending. whilst ensuring that our overall growth trajectory sustains its momentum. We believe we should be playing a leading role in helping to mobilize capital and to deploy it effectively. we intend to further expand our footprint in the country. However. risk management and the use of distribution channels. However.2 Islamic Bank in Pakistan with new branches being added to our network of 110 Islamic banking branches as we speak. We have also introduced relevant management changes and reassessed our operating priorities. Therefore. Investments will likely start pouring into this sector within a year and the pricing offered to the private sector will also be attractive. SME banking and agri-finance are also promising opportunities and address sectors that are the backbone of our economy. Bank Alfalah aims to continue investing in these areas through tailored solutions for each segment. Further. the textile industry is doing well and we are witnessing fresh investments in this sector. in the absence INTERVIEW BY: ALI KHIZAR AND JAVERIA ANSAR Page 14 BANKING REVIEW 2012 / January 28. It is critical that a vibrant and broad based capital market be developed in order to support the financing needs of a growth economy. advances and profitability have all witnessed significant growth over 2012. Then we are beginning to witness great long-term interest being generated in agri-based industries. the good news is that we have not only recovered from that phase but have in fact also implemented the lessons learnt in terms of customer selection. When courts begin dealing with cases quickly enough. this remains a gap. Unfortunately. our core banking system has also changed from a decentralized one. customers and other stakeholders.this was a significant vote of confidence for our employees. Apart from that. the ability to repossess properties in cases of default and also the banks’ ability to arrange long-term funding. Retail sales are already strong and the growth trajectory is likely to remain impressive in the near future. the consumer finance market is also likely to experience growth at the same lethargic pace as witnessed in the early 2000s. therefore as long as national economic growth is sluggish. The Chairman of our Group visited Pakistan earlier this year and during his trip. both equity and debt in Pakistan. BRR: Which economic sectors do you expect will drive growth in 2013? AB: The conventional export giant. both of which should enable us to remain ahead of competition. there will be pockets of opportunity that we intend to pursue. With the shift of wealth from big cities to rural areas. our Islamic branches will follow suit. These efforts have been well received as is evident from the improvement in our share price. As of now. The power and energy needs of the country also mandate that the incoming government will have to drive growth in this sector. the development of a holistic mortgage eco system still has a long way to go. whilst remaining cognizant of and appropriately managing the risks involved. Transactional services will become increasingly faster as a consequence of this change and hence customer interface should be more efficient. we experienced setbacks in 2008 – however. including credit cards. 2013 . BANK ALFALAH 65 471 IN 2012 ADDED NETWORK OF BRANCHES BRANCHES IN 158 CITIES Finally. Currently. reiterated the Group’s commitment to the Bank and to Pakistan . we are confident that we are now putting in place strong management and technology platforms. What are the Bank’s plans to step up consumer banking and also to attract more clients to branches? AB: BAFL is the market leader in consumer finance. which has risen from being at a significant discount to book value at the beginning of 2012. We have implemented new procedures and systems at all our conventional branches and in the upcoming months. there are pockets of growth in other sectors. For instance.Economic growth necessitates development of long-term debt market Atif Bajwa | President Bank Alfalah BR Research: Briefly tell us about the performance of the Bank during the outgoing year. We have also taken steps to boost investor confidence by enhancing transparency. Therefore. BRR: Bank Alfalah has a history of being more focused on consumer banking than most peers. This offers immense potential and we intend to continue to lead the industry trend in this domain. Looking ahead. Today. the performance of this portfolio is directly linked to the performance of the economy. Bank Alfalah has been able to successfully leverage this new distribution model to attract clients across the country. With a network of 471 branches across 158 cities. we have also been investing in developing a state-of-the-art technological platform in order to remain ahead of change and competition – I am pleased to report that as a result of these efforts. We have added 65 new branches to our already vast branch network during 2012. Therefore we foresee increased activity in 2013 in the energy sector. the cement industry has not witnessed a major spike in demand but has done relatively well due to the strength of international prices. Additionally. willful default will automatically be dealt a death blow. there is appetite in these markets and so it makes sense to open smaller branches to tap the potential there. auto loans and merchant acquiring. ‘feet-on-street’ model which focused on sending sales personnel to prospective clients. for example. of robust systems and procedures such as these which ensure mandatory controls and mitigate risk. right up to the current level which is closer to book value. One other area of focus for banks will be the nascent capital market. we will be launching branchless banking and mobile banking services in 2013. banks are lending amongst just those pockets within large cities where property titles are clean and real estate markets are not overly skewed or cornered in order to appropriately manage risk. This year. these pre-requisites have not been met to the satisfaction of a growing need in Pakistan. We are the no. unfortunately.

will also be sold off to Habib Bank Limited”. As it continues to reposition its services to focus on its core competencies. we hope multinational corporations is based on its solutions-oriented that there will be significant multilateral and bilateral approach. Lahore and Islamabad”. Nadeem Lodhi revealed “Citibank will soon launch a mass-market. Citibank had earlier sold its mortgage finance portfolio in Pakistan. infrastructure”. INTERVIEW BY: MOBIN NASIR BANKING REVIEW 2012 / January 28. agriculture and bilateral trade among sunrise sectors Nadeem Lodhi | Managing Director and Citi Country Officer “When it comes to large ticket mergers and acquisitions. “All reward points accumulated by our credit card holders will remain valid and the rebranding will be gradually phased in by HBL” Mr. given the thrust on technology and Citibank’s “branch agnostic operations”. Mr. Citibank is the market leader in the foreign exchange segment and holds of the multinational corporates’ wallets Our commitment to Mr. Countering recent reports published by some local newspapers. Financial Institutions. Lodhi pointed out that the Bank’s core competencies lie in corporate banking and investment banking. “At the beginning of 2011. we will have three branches in the country. Lodhi asserted that the Bank will not be impeded in service delivery in corporate and investment banking. Lodhi revealed. highlighted energy and “As other foreign banks have infrastructure as growth areas and market share in those down-sized operations in the hinted that the Bank will soon help sectors where we can fully country. Lodhi also highlighted that the Bank is the market leader in the When quizzed over the Bank’s serving our niche clientele in foreign exchange segment and expected performance in the Pakistan remains strong and holds 55 percent of the coming year. Airlines operating in the many prospective investors mulling over country have also moved to Citibank for their developing new energy infrastructure in banking needs. We are well geared to facilitate Bank’s popularity among large national and such investors and going forward in 2013. we were operating 16 branches in the country which have gradually been reduced to seven at Summing up. best-in-class cash management services and credit support for the development of Pakistan’s energy superior technological platforms. We are bullish on the future prospects for this economy and the growth of the banking industry in Pakistan”. 2013 Page 15 . Citi had just concluded advising British Petroleum on the sale of its assets in the country. having advised on all major mergers and acquisitions that took place in Pakistan during the course of the outgoing year” informed Mr. The bank was also the exclusive financial advisor to Phillipines-based International Container Terminal Services. Nadeem Lodhi. pre-paid VISA card for Public sector as well as for our corporate clients”. Our commitment to serving our niche clientele in Pakistan remains strong and are keen on growing our market share in those sectors where we can fully deploy our global presence”. But Mr. “once we receive the final clearance from the apex regulator. In a recent interview with BR Research. On the consumer lending front. Lodhi maintained that the Bank will remain committed to service delivery and innovation here and pointed out that Citibank’s focus on episodic transactions is evident from its involvement as Joint Lead Manager in the Exchangeable bond issuance mandated by Government of Pakistan. Pakistan is a core country for Citi. “On this front. one each in Karachi. he added. As part of its global repositioning drive. AkzoNobel exclusively on its divestment of 76% equity stake in ICI Pakistan. Nadeem Lodhi asserted that the the country. we have enjoyed stellar performance this year. The two banks will transition this portfolio over the span of three to six months. Citi is the market leader in Pakistan with almost complete dominance over inward as well as outbound flows”.Energy. said Mr. major local corporates and Multinational clients in Pakistan. Nadeem Lodhi revealed that. Citi has been chosen as the forge deals in these sectors. our consumer lending portfolio which now mainly comprises of credit cards. he said “ Citi Pakistan remains committed in its vision of being the leading Corporate and Investment bank for Public Sector clients. “Within the Emerging Markets. At the beginning of 2012. said Managing Director and Citi Country Officer. Lodhi. “By the end of the first quarter of 2013. to BankIslami. Citibank has recently announced the sale of its consumer segments in about half a dozen countries including Pakistan. Lodhi. he stressed. Citibank has also reduced the number of branches it operates in the country. “banker of choice” by the impacted “Energy sector holds immense deploy our global presence mulitinational companies” ” he potential in the country and there are contended. Incorporated (ICTSI) on its acquisition of strategic equity stake from the sponsors of Pakistan International Container Terminal Limited. During the year the Bank advised. Citibank maintains strong partnerships with large local banks. Nadeem Lodhi are keen on growing our multinational corporates’ wallets. present” said the Bank’s head.

In contrast to this. a lack of viable derivative instruments in Pakistan also serves as a factor marring the development of corporate bond market in Pakistan. So the opportunity cost of investing in the corporate bond market is high. Besides structural and macroeconomic issues. This leaves small and less renowned companies at a competitive disadvantage regardless of their operational and financial performance. the outstanding amount tallied Rs68 billion as of June FY11. the growth patterns were not very encouraging as the mainstream growth came from the government sector which accounted for 80 percent of the total growth while corporate bonds. banking sector credit.Corporate debt market: Towards a sturdier financial system: Sobia Muhammad Saleem Global Scenario Corporate debt market has increasingly been touted as an integral part of a resilient financial system. By comparison. From issuer’s perspective. 2013 . accounting for less than one percent of GDP. barely 109 Term Finance Certificates (TFCs) worth Rs110 billion have been issued by the private sector out of which. with global debt-to-GDP increasing from 218 percent in 2000 to 266 percent in 2010. Moreover. Page 16 BANKING REVIEW 2012 / January 28. the outstanding government domestic debt and liabilities clocked in at Rs6. Liquidity constraints are also attributable to a lack of an active secondary market for corporate bonds. bond markets constitute about 175 percent of GDP in the US and 198 percent in Japan. bonds issued by financial institutions and securitized assets collectively constitute 20 percent. incompetent market infrastructure. lack of diverse instruments and a thin investor base. the corporate debt market is unattractive due to lack of incentives. Amid fragile regulatory and legal framework. The presence of a well-established corporate debt market triggers the banks to hit upon new products and tap the SME sector that would automatically generate and increase economic activity. during FY11.S) 25 20 15 10 5 0 FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 80. International Organization of Securities Commission states that the corporate bond market is at its nascent stage in most of the emerging countries mainly due to factors such as underdeveloped regulatory framework. According to McKinsey Global Institute. leaving them with little incentive to extend financing to the private sector.226.000 20. Further. They yearn for high return but at the same time are concerned about the reliability of their investments. CORPORATE BOND MARKET PERFORMANCE Outstanding Corporate TFCs Number of Issues (L. the corporate debt market has lagged far behind. the low risk-bearing capacity of Pakistani investors encourages them to prefer government securities over private sector bonds. Developing corporate bond market The non-existence of corporate debt market in Pakistan is justified by myriad micro and macro economic challenges with the foremost challenge being building market players.000 60. tedious listing requirements. hefty underwriting fees and cumbersome primary issuance guidelines. institutional investors are restricted by statutory requirements to buy government bonds. Thus. the amount of global bonds outstanding grew by $5 trillion in 2010. Where does Pakistan stand in this run? The debt market in Pakistan is in a fledgling stage.000 40. comfort on which is dictated by their familiarity with the company’s name. It not only creates a multifaceted financial system whereby capital markets compliment and in some way regulate the banking sector but also provides a broader spectrum of investment avenues to the investors besides providing a source of long term funding to the borrowers. Snooping the other source of debt financing i. However. Retail investors are more sensitive to reputation and brand recognition.e.000 10. there is no protection for the issuers and also no assurance for the investors that their interest payments will be made on time. In addition to this. while the Government bond market has shown healthy growth.000 50.000 70. Moreover. Risk-free government securities have provided banks with an alternate investment avenue with embedded advantage on their Capital Adequacy Requirements (CAR). hefty underwriting fees and cumbersome primary issuance guidelines.000 - The corporate debt market is unattractive due to lack of incentives. Since FY95. if we look into the matter thoroughly from the investors’ perspective. tedious listing requirements.H. The risk-free nature of various government securities and National Saving Scheme. the improvised rate adjustments on such instruments and the ability to redeem them prematurely. the private sector companies that issue corporate bonds are open to various exogenous risks. a lack of awareness has always been the key reason hampering retail investments in the corporate debt market. This factor proved to be a tough call for the issuers leading to under-subscription. private sector credit only grew by four percent as compared to a surge of over 74 percent in government borrowing from commercial banks. entice risk-averse investors.000 30.4 billion at the end of FY11.

reducing the time and cost for the shelf registration of bond issues.Participation Term Certificate (PTC). measures to deepen and grow the corporate bond markets will not work unless they are accompanied by robust regulatory and supervisory frameworks and strengthened investor protection endeavors. She can be reached at: sobia.mesiya@gmail. To improve market competence.The development of corporate bond market in the country is imperative. Going forward. further efforts should be made through advisory services to make investors fully understand the risk-return trade-off. Albeit. its establishment is only possible if policymakers lead the charge in developing a vibrant corporate debt market. Finally. This includes developing a wider range of BANKING REVIEW 2012 / January 28. particularly in lower maturities. the growth in the primary bond market is not possible unless it is complemented with an efficient secondary market platform. WAY Forward The writer is a Research Analyst at Business Recorder. 2013 Page 17 . Growth in the bond market can also be elicited by the introduction of relevant derivative instruments to enable the issuers and investors to hedge their respective risks. etc. as well as enhancing bankruptcy and restructuring regulations. creating an efficient government benchmark yield curve. Moreover. These include enhancing the quality and timeliness of disclosure by issuers. with the issuance of Government bonds for various maturities up to 30 years the sovereign risk-free curve does exist. standardizing and simplifying bond offering documentation. measures should be taken to broaden the range of primary bond offering methods. development of Islamic debt instruments can add depth and breadth to the market. strengthening surveillance and supervision. Given that the debt market has witnessed some improvement illustrated by the recent effectively subscribed debt issues by Standard Chartered Bank and KESC. however. establishing a corporate bond index and removing regulatory obstacles which hinder the participation of investors. Innovation in the debt market is another criterion that could trigger growth. there is a need for a smooth yield curve as most of the investment is confined to a few points. fostering trading and price transparency. This includes enhancing trading efficiency by developing a market-making system. Treet Corporation Limited has recently added novelty to the corporate debt market with its announcement to raise finances through a unique instrument . This includes capacity building at SBP and SECP and collaboration of FBR and GoP to rationalize tax treatment of corporate debt instruments. The question that now arises is “how?” While the private sector’s indolence in tapping the bond market is substantiated by the aforementioned factors.

non-performing loans stand around 16 percent. and we can develop sustainable and meaningful relationships with them by providing a comprehensive range of products that cater to all of their needs. We want to keep working that. multilateral non-governmental organizations. healthcare and education in a sustainable manner. We play in certain corridors where we think we have the best possible solutions for our clients. we are promoting that in the schools. Barclays has been a big beneficiary of this retrenchment and we’re taking full advantage of it. to increase entanglement with the Bank. But there are multiple factors contributing to the rising trend of NPLs. then a bank working on slimmer margins than us would take our clientele away. are now reaping the benefits. What is more. we’re trying to get into the DNA of our clients. the falling spreads will be severely damaging particularly to smaller banks. which should be indexed to discount rates. That’s what makes foreign bank contributions unique. Barclays Pakistan BRR: What is your view on the general business environment in Pakistan? Are big companies borrowing more for expansion purposes? Shahzad Dada: Generally. how has the journey been for Barclays? SD: We have a very unique strategy and positioning. We shut down seven branches this year. So larger companies that have invested in their businesses and have positioned themselves for the future. We want to play to our strengths and become the go-to bank for multinational and large national corporations. we are not all-things-to-all-people. Let’s face it. Right now. should be done because the presence of a good mix of local and foreign banks will boost competition and innovation in the country. the banking courts are severely understaffed. If we didn’t have that. But generally. but our deposits per bank have grown from Rs3 billion last year to Rs4 billion at present. As for the children’s product. BRR: What do you feel is the impact of foreign bank retrenchment in Pakistan? SD: It isn’t good for the industry. Another key issue is the minimum rate. DEPOSIT GROWTH 03 BILLION RUPEES PER BRANCH BARCLAYS BANK IN 2012 04 BILLION RUPEES INTERVIEW BY: MOBIN NASIR AND SIDRA FARRUKH Page 18 BANKING REVIEW 2012 / January 28. with diversity come best practices. the scalability of playing to our strengths is there. Firstly. Foreign banks have historically been trend setters for products and services. Also. which is too high. Total advances are marching on. there is a lot of backlog in banking court cases. it’s all about playing your strengths. and we have managed to retain our clients. SMEs and consumers. and we’d like to commend the SBP’s efforts in this regard. so we must be doing something right. Our projects are geared towards skill development. What expectations does the banking sector have regarding recovery laws and the proposed Corporate Rehabilitation Act (CRA)? SD: There is industry-wide consensus that the proposed Corporate Rehabilitation Act is crucial for the success of the banking industry in the country. We are seeing volumetric growth which is meaningful. development organizations and diplomatic missions. particularly wilful defaults. How do you feel your strategy will work in the long run? SD: Like I said. These companies run three-fourths of their trade through our counters. Secondly. Anything we can do to prevent this happening in the future. A good reflection of that is the performance of these companies on the Karachi Stock Exchange (KSE). it is absolutely necessary that laws such as CRA and the relevant NAB Ordinance are implemented. BRR: How are your new products developing at Barclays? SD: We have played to the remittances. We know our clients. BRR: Over the past year. where NPLs prevent more profitable lending to corporates. The PBA is lobbying the Government at the highest level to ensure that these vacancies are filled as soon as possible. There is a large amount of remittances’ inflow from countries across the globe. BRR: Most players in the industry feel that a niche approach to business in banking is unsustainable. But we are a competitive bank and we do not want to win by someone else dropping out. Like our corporate strategy. our global outlook. this proportion is still on the rise. But that isn’t happening because we service our clients in a holistic manner and in that regard. the kind of clients we are dealing with are showing a lot of promise and growth. It is particularly disconcerting that 37 percent of these NPLs are originating from the consumer lending portfolios of banks. Due to such constraints. foreign investments are necessary. On the other hand. successfully.Hire more judges for banking courts Shahzad Dada | Chief Executive Officer. BRR: As the President of Pakistan Bankers Association. we re-aligned our business and rationalized our costs. We are also going to certain schools such as Karachi Grammar School and Bayview. The PBA invested in educating the judges regarding banking procedures. We have been implementing this strategy and we’ve made a lot of progress. We can provide them the necessary corporate banking services like we provide to Nestle and Unilever. Operating leverage is kicking in to the bottom line growth. it is a disappointment for the industry. you have intimate knowledge of the evolution of recovery laws in the country. We are continuing to march along that path. since 2008 weaker players have found it very difficult to operate due to the energy crisis and the law and order situation. some of the irrational behavior has moved away. In anticipation of a declining spread environment. as far as the country is concerned. We will not be shameful about wanting to dominate a certain category of clients. high net-worth individuals. A bank like Barclays can really be instrumental in bringing in foreign investors. and those have deepened. At present. 2013 . and many of them have been marginalized. it isn’t good for foreign banks and it isn’t good for the country. and can bring it here more smoothly. That is not to say that the local banks have not done amazing work. and I think small banks can well pursue such a strategy. regulations and laws but about half of all positions for judges in the banking courts are still vacant. Our CSR is strong and we want to make a difference to the society around us. there is a lot of technology out there and foreign banks have been dealing with this for a long time. superior service and trade support are the key strengths that drive success. We are doing it with our value-added clients. For all of these. the focus in our CSR program is also on quality rather than quantity. Also. particularly the UK. When you lose those big brands. employment generation and the provision of basic amenities. There should be no leniency in cases of wilful default because those who operate with impunity from the law cause the most damage to the country’s banking sector and also force banks to be shy of honest borrowers and those with genuine problems who deserve a lifeline.


. . . Singapore -30 -20 -10 0 10 20 30 2006 20 40 60 80 100 Islmic banks' infection & coverage NPLs to Total Loans Provision to NPLs Regional real interest rates .6 63 7. Malaysia China 2009 2010 2008 2009 2010 2011 5 Regional import cover (no. . Malaysia Credit by banking sector (as % of GDP) China . . . Malaysia China -5 -10 2011 2010 2009 2008 2007 2006 30 40 50 60 Page 20 BANKING REVIEW 2012 / January 28. Singapore . Pakistan Singapore Sri Lanka Malaysia India China Bangladesh Regional NPLs Pakistan 20 2012 8.8 59. . India 30 25 20 15 10 5 0 2006 2007 (as % of gross loans) Singapore . . Pakistan India 2011 2010 2009 2008 2007 2006 -40 Bangladesh . Pakistan 2011 2010 2009 2008 2007 Sri Lanka India Bangladesh . . Pakistan Sri Lanka India 2011 2010 2009 2008 2007 2006 0 10 20 Bangladesh .Banking Numbers Government debt (as % of GDP) . .7 10 15 . 2013 .5 2011 7. of months) 0 .. .6 6. . . . . .3 51.3 58. . .

0 .0 (20.000 6. 11-20 Banks k ks 6-10 Banks 23. Total Bank branches Local Banks Foreign Banks 2012 2011 2010 2009 2008 2007 2006 . .0 30.7 21-27 Banks SBs 3. .8 SHARE OF MENTS T TS TOTAL INVESTMENTS 1. .5 . Category-wise ROE Public Sector Commercial Banks Local Private Banks Foreign Banks Commercial Banks 140 120 100 80 60 40 20 .7 51 0 (10) 2006 2007 Jun-12 2011 2010 2009 2008 Regional Risk Premium Regional banking spreads Sri Lanka 9 8 7 6 5 4 3 2 1 0 2006 2007 2008 2009 2010 Bangladesh China Singapore Malaysia Pakistan Rs bn 700 600 500 400 300 200 100 0 .0 60. . lending & infection Infection ratio Advances (LHS) Rs bn 2000 1600 1200 20.000 1. Advances (net) Rs bn 8.0 40.NPLs and provisioning .0 .0 20.0 800 400 0 10.000 2. 6 5 4 3 2 1 0 -1 2006 2007 2008 2009 2010 2011 Provisioning Charges (ytd) CY06 CY07 CY08 CY09 CY10 CY11 Jun-12 Banking sector's total assets (Rs bn) 10. . 2013 Page 21 .000 5.000 2.3 Non-Performing Loans Top T To p5B Banks 51.000 2. Contrasting asset class growth Loans (Net) Investments (Net) % 80.000 4.000 3. .0 0.Sector-wise .500 1.000 0 CY10 CY11 Jun-12 Islamic banks' ADR 60 50 40 30 20 10 0 2009 2010 2011 Jun-12 8.0) 4000 6000 8000 10000 (40.000 6.000 500 0 CY06 . 17 1 7 75 .0) CY06 CY07 CY08 CY09 CY10 CY11 Jun-12 0 2000 Others Textile Energy Agribusiness Individuals Chemical Sugar BANKING REVIEW 2012 / January 28.000 3.000 4.000 Asset mix & deposits Deposits (RHS) Investments (net) Rs bn 4.000 7.500 3.FBs 2.0 0 40. .000 1.500 2.000 0 CY07 CY08 CY09 CY06 CY07 CY08 CY09 CY10 CY11 Jun-12 .

2013 . Silk Bank Ltd Soneri Bank Ltd.14 55.G. Faysal Bank Ltd. Local Private Banks (22) AlBaraka Bank (Pakistan) Ltd. Oman International Bank S. The Bank of Khyber The Bank of Punjab B.52 ** 72. Dubai Islamic Bank Pakistan Ltd. Deutsche Bank AG HSBC Bank Milldle East Ltd. Foreign Banks (7) Bank of Tokyo . Public Sector Commercial Banks (5) First Women Bank Ltd. Declining ADRs Liquid Assets/ Total Deposits 80 70 60 50 40 30 CY07 CY08 .52 73..80 277.9 9. National Bank of Pakistan Sindh Bank Ltd.Mitsubishi UFJ. Specialized Banks (4) Top T To p 5 Banks Ba 6-10 Banks nks k ks 22.49 93. Burj Bank Ltd.39 84. Industrial Development Bank of Pakistan Punjab Provincial Co-operative Bank Ltd. Summit Bank Ltd (formerly Arif Habib Bank) United Bank Ltd. Habib Metropolitan Bank Ltd. in mn FAYSAL BANK LIMITED BANK ALFALAH LIMITED STANDARD CHARTERED BANK (PAKISTAN) LIMITED MEEZAN BANK LIMITED UNITED BANK LIMITED NATIONAL BANK OF PAKISTAN NIB BANK LIMITED SILKBANK LIMITED ALLIED BANK LIMITED HSBC BANK MIDDLE EAST LIMITED . Standard Chartered Bank (Pakistan) Ltd. Bank Islami Pakistan of directors FBs 2.65 31.20 52. NIB Bank Ltd.7 SHARE OF POSITS P OSITS T TS TOTAL DEPOSITS 0.1 Top T To p 5 Banks k ks 6-10 Banks k ks 70. Barclays Bank PLC Citibank N. Allied Bank Ltd.O.63** 58.PAKISTAN OPERATIONS Banks in Pakistan 2011 188. Habib Bank Ltd.6 CY08 CY09 CY10 CY11 Jun-12 SHARE E OF ADVANCES CHIEF EXECUTIVES' REMUNERATION (YEARLY) Rs.2 9 17. 21-27 Banks Advances to Deposit Ratio 2.82 A.A.84 29.77 94. JS Bank Ltd. C.4 53.4 21-27 Banks SBs 3.6 1 6 11-20 Ba Banks anks k ks D.00 77. Ltd. 0.53 74.A.1 FBs SBs 11-20 Banks k ks 0.3 17.55 69. SME Bank Ltd.6 7 70 0.58 57. SAMBA Bank Ltd. Industrial and Commercial Bank of China Ltd.31 137.7 7 53. Source: Banks’ annual reports Value of asterisk(*) . Bank AL Habib Ltd.61** 106. Bank Alfalah Ltd. KASB Bank Ltd.2 1 17 72 7. MCB Bank Ltd.57 2010 133. Zarai Taraqiati Bank Ltd Page 22 BANKING REVIEW 2012 / January 28. Askari Bank Ltd.53** 58. . Meezan Bank Ltd.


Investment banking activity will not be funded by customer deposits. gives them immense capacity to negotiate greater freedom out of regulators. Therefore high-return. FDR‘s reforms put a series of restrictions on what banks could do. was known well before the onset of the current financial crisis – and illustrated starkly by the Great Depression. and stable. and with the potential to precipitate financial crisis. is the principal spur to the creation of this ‘bubble’ wealth. which will sooner or later have to be written down. The counterpart of this public ‘trust’ is the implicit commitment of the banks to foster economic development. But the post Reagan market liberalization set aside a number of those restrictions. And so on… If these reforms work. But banks can fail this trust.The cost of failed mandates: When banks ignore public duty Syed Salim Raza Regulators and national financial authorities have to ensure that banks create their earnings by generating activity in the real economy. Page 24 BANKING REVIEW 2012 / January 28. The US. wealth created is unsupported by economic value. dividends. etc. In the EMs. Banks had to be supported by governments. there is recurring international history of banks’ regularly pushing the chase for higher yields to an unsustainable limit. perhaps generational. rounds of crises in Argentina. or monetary and fiscal concessions had to be given to ease pressure on banks – all of which had public costs. as mentioned earlier. ‘market’ solution. income growth. and their cost of capital would rise. banks will indeed begin to look more like utilities. UK and the Eurozone – but it applies equally to developing countries. against $92 of public funds (deposits). The counterargument of banks would have been that the high profit expectations of investors would have to be met. such ‘speculative’ risk exposure can. If financial earnings outstrip real growth. Periodically. UK and EU face huge. Profit-maximisation to create shareholder wealth seemed to have become an acceptable goal for the banking system – whereas the implicit social contract would have required that banks be managed rather like public utilities i. and transform them into investment for productive national enterprise. savings products and balance sheet loans. hitting banks’ capital. The public service objective can be compromised by private. Russia and Turkey. and to increase national savings. the “Tequila” (Mexican) crisis. aim for moderate return on capital through long-term. The 2007 financial meltdown was the result. If financial crises and ensuing losses erupt from the drive for ‘excess’ profits for banks shareholders. ‘perfect storm’. the Nasdaq crash. including credit to Government itself. generated from productive lending. and that banks can become the ‘Achilles heel’ of capitalism. Derivatives are not to be used for speculative positions. and to Pakistan. The public mandate for banks is to manage national mechanisms for payments. or any kind of private. If they were not. which would hamper their capacity to grow. completely unviable.e. banks’ share price would languish.and does – stretch too far. focusing their remit to savings and loans. profit-maximising activity. via Central banks and the national treasury. 2013 . purely financial. the extended Japanese crisis (banks led up the asset price inflation). The growth in earnings of the banking sector should track the progress of the real economy. This challenge today is of course most severe in US. the intermediation role of the banking system is the central agent for economic development. Looking forward: the reforms being undertaken aim to restrict the use of public deposits to mainstream banking activity i. The chain of such instance stretches forward from the ‘70s – accumulating momentum over time. But the reality is that power of banks over credit creation. while losses are passed on to taxpayers. and losses force banks to fall back on Government for life-support. with profit. business lines needed to be pursued. the S&L crisis. then Government is effectively complicit in allowing the privatization of banking profits. Governments back their banking systems with their own (Sovereign) credit as needed. costs. That financial capitalism is prone to excess. the Asian crisis. The sanctioned authority for banks to use high leverage (at least 12 times the initial capital). Banks diversified into much higher risk investment banking activities. The Latin American debt crisis. alongside normal business. from the present financial crisis. and share prices soaring. The general public’s reliance on government support allows banks to operate with very high leverage: every $100 on their balance sheet is supported by just $8 of their own shareholder funds (capital). The speed with which crises spread across the banking system makes ‘market’ selfcorrection. While the current crisis may illustrate a multi-origin.e. albeit higher risk. while preserving their capital through conservative risk management. became the darlings of equity market players.

Public-sector banks both compete with. the spread of mobile banking. and developed a new generation of businessmen from its SME sector. counters the extensively quoted cross-country study by LaPorta et al in 2002. Kroner and Schnabel) argues that. given sufficient political maturity. its mining resources. if banks wish to opt out of directed developmental lending. UK and EU. There are new forms of financial services that hold promise for increasing financial inclusion. Our development finance institutions were closed down. Public intervention in finance absolutely does not preclude private ownership. governments have taken extensive ownership of their banking systems. Banks use the regions as sources of funds for their lending operations. as in India). EM governments expect commercial banks to play a transformational role. so corporate bond markets can develop. plus direct costs that may end up in trillions of dollars. has been stagnant. is making steady inroads into the formerly unbanked. commercial banking activity has in fact declined. in specialized entities. we will postpone the revival of national growth. Bank deposits are now 28 percent of GDP. He holds a Masters degree from Oxford University and has had an illustrious career in banking. Nevertheless. In consequence. via vitalized institutional capacity. among others on the same theme. and mortgage and agricultural lending. even though it has cost the developed world 2-3 percent of GDP for four or five years. All banks employ predominantly public money. of financial services. and largely private-sector boards that oversee governance and that appoint CEOs. and sometimes lower. Common Money Market instruments – Commercial Paper. In the US. into the formal banking system. But finance. from 15 percent to 35 percent. today. If the private sector will not take the lead in developing appropriate initiatives. But our mainstream commercial banking has lacked dynamism. and an underdeveloped financial framework. Acceptances – have failed to develop.shrunk. with predominantly (80 percent) private sector ownership. then the government has to set up its own capacity to address development finance. taking an 80 percent share. using venture capital and perhaps an alternate stock market for small companies listing. regulatory compulsion is undesirable: if banks will not participate voluntarily. financing infrastructure. about 45 percent. Private owners of banks may not share the same objectives. to compensate for low private demand. down from 17 percent some years ago. have they better achieved the ‘public purpose’? As domestic markets usually lack the full-blown array of specialized financial services of the developed world. which does not increase the size of the economic cake. mainly in Central Punjab and Karachi. while losses are passed on to taxpayers. Pakistan lacks dedicated institutions for infrastructure and specialized project financing. in India. 70 percent.g. With respect to other priority sectors. with several virtuous economic effects – competition for its paper would have reduced the BANKING REVIEW 2012 / January 28. and at present. as opposed to profit-maximisation. the leading banks had been able to earn 2-3 percent more than the rate they pay their depositors for similar maturities. social and development objectives have been met more successfully when public ownership has been significant. even extensive private ownership. Obviously. the sustainability of economic recovery in the US and Europe will depend critically on credit expansion by banks. banks would have to raise rates paid on deposits. through their lending to Government. And the public mandate of the banking sector will remain unfulfilled . Government’s borrowing costs. and gain management and product expertise from. we have a well –capitalized. The banking system has been stagnating. and taken the lead in mobilizing the development of specialized lending capacity.e. at only seven percent of GDP (while the sector amounts to 23 percent of GDP). on the back of it. With respect to the priority sectors of infrastructure. While withdrawing from general development lending. bank lending to agriculture. will not qualify us for a Government-led financial sector – as required in the Max Planck Institute study mentioned earlier. Most of this financing supports government’s power and PSE losses.First. But the financial sector as a whole. the effort may achieve fast incremental integration of informal markets. build a proper Government debt market. Major EMs pave the way for growth through technically strong and diversified financial institutions nurturing the priority sectors mentioned. with respect to key development priorities – i. agriculture and regional lending. If financial crises and ensuing losses erupt from the drive for ‘excess’ profits for banks’ shareholders. deposits to GDP are 57 percent. 2013 Page 25 . Secondly. and declining holdings of Government paper would have forced banks to increase lending to the private sector. In Pakistan. then let the leadership come from public-private initiatives – just as long as the institutions are independent of ministries. we need to reengage with the SMEs. and alongside it. Pakistan well emerge as a regional leader in this area. In addition. the financial sector in BRICs is completely open to the private sector. but loans to the regions are under Rs100 billion. in the SBP. With respect to regional finance – overall excluding Sindh and Punjab. to opt out of a solid commitment to development financing? Should a schematic of compulsory. SME and less developed regions. while the SME sector now draws only six percent of total credit. then Government is effectively complicit in allowing the privatization of banking profits. both have – as a proportion of GDP . The greater bias on development. versus 34 percent in 1999. etc. in the public sector. The banking system in the Emerging Markets (EMs) has avoided the high-risk strategy of banks in the US. Is it reasonable for any. in Pakistan. We need to set up project and infrastructure financing capacity. agriculture.albeit that banks will remain profitable.. and have independent. For India. or commodity purchases – a totally unproductive use of national savings. ‘directed’ lending for national priority sectors be laid down for all banks (e. over time. the share of the manufacturing sector in total economy-wide profits. with all its attendant risk. We need to do the same. should some form of ‘sanction’ apply. an important issue does arise here. government deficits are likely to increase. remain only about six percent of bank deposits (compared to the global average of 30 percent). and loans are about 50 percent of GDP in both countries. the rest of Pakistan has about Rs700 billion in deposits. then. there is a big market anomaly at work here: Governments should normally raise money at the lowest price in the market. dropped from 49 percent to 15 percent. and in both Brazil and Russia. while the profits of the financial sector doubled. professionally managed banking sector. It need not be so. if it has been able to develop its infrastructure. That is the cost of the failed mandate. and at the Ministry of Finance. Syed Salim Raza is the former Governor of State Bank of Pakistan. government ownership in the banking system in China is 90 percent. So. With the possible exception of China. Both ratios are well below that in other EMs. Secondary markets in Pakistan remain stunted. from 32 percent in 2008. What can be done is well known. aligns public/mixed ownership to accepting longer term. its power capacity. the leading private sector banks. but overall at Rs300 billion. that documented a negative correlation between public ownership and economic growth). Our still maturing political institutions. for example. SME. the banks use their buying power to turn Government into a ‘price-taker’. over the 50 years to 2008. In the longer run. in Bangladesh 54 percent. returns. and the Bond market is small and stagnant. even in the near future. has not made noticeable progress against its development mandate. A dynamic mutual funds market would have competed with banks for buying Government paper. It is tiresome to repeat initiatives that have seen stalled starts. The duty must not lapse through default. after reaching 30 percent of GDP in 2007. most likely in PPP modes. But not for long – if national growth stays muted. banks have built up huge exposure to the public sector – to slightly over 50 percent of their credit books. Private sector credit. Without a banking sector that has the diversification to service all parts of the economy. But as heavily dominant buyers of Government paper. After a rapid growth in credit and deposits post privatization (after ’99). Pakistan can achieve sustainable levels of GDP growth rates of 6-8 percent. and much weaker than in the region. with a demonstrable spillover into higher growth (this study. A study at the Max Planck Institute at Bonn (Sept 2010. with competition from the funds. In holding government securities. such as a higher tax rate? However. its agricultural productivity. is down to 16 percent now – the lowest level in decades. Branchless banking. still holds the power. BRICs have a range of Government-owned specialized institutions for long-term project development. Mutual funds have made some progress. The financial economy became much more profitable than the real economy simply because it uses high leverage. In the BRICs. Looking out a few years. With domestic debt servicing already taking up half of national tax revenues – and growing faster than tax revenues – debt serviceability will impose extremely challenging burdens. globalization and free flow of international capital has made banks a much bigger part of national economies than formerly. and if not.

“The Bank has cut losses consistently every quarter over the past 15 months”. Lawai revealed that the “process of team building is ongoing. 2013”. he called for accountability within the judicial system whereby the superior courts may ensure timely judgments on bank-related cases.6 PERCENT and ability to repay. SBP” contended Husain Lawai. he summed up the agenda. so after the reconstitution of the Board.22 BILLION RUPEES FY06 CY12 In a country where more than half the economic activity is generated from undocumented sectors. Sialkot and other cities cost upwards of 30 percent. AVERAGE COST OF DEPOSITS PRESENT SCENARIO 14 PERCENT 7. President Summit Bank Limited. especially designed for minors was launched on January 10. tapped the existing network of Punjab Provincial Bank and others to be able to distribute remittances across the country. Husain Lawai who led a consortium of local and foreign investors in the acquisition of Arif Habib Bank Limited (AHBL) in 2008. said Lawai adding. he cautioned that banks have to be more personalized and prudent in their operations. it is fairly easy to shuffle the Board of Directors.6 percent. he said and cited that “the average cost of deposits has been reduced from as high as 14 percent to 7. “The discount rate would be 8 percent if I was Governor. not on size because it is always easy to attract deposits. presently”. so there is tremendous opportunity for banks to lend here” contended Husain Lawai. formerly separate banks”. the industry-wide problem of non-performing loans will be comprehensively overcome”. to Rs 129. The Bank President conceded that the persistently negative bottom line has remained an eyesore. The small bank which has expanded its asset size from Rs 5.Focus is on cost of deposits. What really matters is the experience that each client receives when they walk into your bank”. Since that time. Lawai contended that by diversifying the deposit base and securing low-cost of deposits. He credited the lower cost of deposits to a change in the mindset of branch managers and staff that are now “increasingly focused on generating core deposits from middle-market customers”. “The focus is on the cost of deposits. the first task we undertook was the implementation of a single. the discount rate has a limited impact on growth and inflation. which will hopefully propel our position in this segment going forward”. In SMBL’s case. “We have partnered up with Western Union to offer the best IT platform for home remittances. 2013 . However Lawai highlighted that “capital worth Rs1. is not fixated on growing the bank’s asset base immediately. banks need to inculcate persevering relations with their customers.696 billion in FY06. Husain Lawai told BR Research. according to the State Bank of Pakistan. “if we can improve our judicial system to expedite the hearing of cases. However. the Bank will be well poised to grow while shoring up the bottom line. Husain Lawai revealed that a “new product offering. INTERVIEW BY: ALI KHIZAR AND SOBIA SALEEM Page 26 BANKING REVIEW 2012 / January 28. Instead of limiting itself to a brick-and-mortar presence. which is quite reasonable” said Lawai. “all three banks had bad portfolios with a hefty proportion of bad debts”. not size Husain Lawai President Summit Bank Limited “Developing a team with unified vision and goals is the biggest challenge after a string of mergers and acquisitions”. instead of relying on blanket benchmarks”. what matters is how much you have to pay for them”. this realization is to culminate in the form of new products aimed at children. he explained “In a country where more than half the economic activity is generated from undocumented sectors. PRI office” said Lawai adding that. “At the end of the day. “spending time to learn about each client. Gujranwala. For the long haul. Conversely lowering the benchmark rate will spur investment in the documented sectors which is crucial for reviving our stagnating economic growth”. “SMBL ranks seventh among banks for distribution of home remittances. Backing his view.696 BILLION RUPEES 129. and will likely be completed by the end of this year before the core team has been carved out of the combined resource pool of the three. and is aptly named Summit Bank Limited (SMBL). The former head honcho of MCB. The interview came at a time when SMBL is in consolidation mode. is President Summit Bank. their requirements SUMMIT BANK ASSET SIZE 5. he said. Drawing examples from other countries where courts provide definite time lines for the resolution of financial disputes. the discount rate has a limited impact on growth and inflation. matching the deposited amount in the account. President SMBL is convinced that. Summit Bank has embraced branchless banking with the help of Ufone. Now they make up only about 12 percent of this tally. In the drive to boost low-cost deposits he highlighted the Bank’s current account product which offers health insurance to depositors. President SMBL treads cautiously. “This product has been quite successful and we will also re-launch it soon with a strong marketing campaign” he revealed.5 billion was injected in the Bank last year and we are putting in another Rs2 billion this year after which we will be MCR-compliant”. Conversely lowering the benchmark rate will spur investment in the documented sectors which is crucial for reviving our stagnating economic growth “There was a time when our ten biggest depositors constituted 45 percent of the total bank deposits. Behind the string of M&A’s and the consequent rapid rise of the Bank. he said highlighting SMBL’s vigorous focus on transparency and accountability. efficient and effective set of systems and procedures”. “Speedy justice is the key to curbing a culture of default with impunity”. Lawai has guided majority share-purchase agreements with MyBank Limited and Atlas Bank Limited.22 billion in CY12 is built on a mountain of mergers and acquisitions. he summed up. “Our studies show that borrowing from the informal sector in Gujerat. But when it comes to the human resources employed by the Bank. “All three banks had been using different systems to manage operations. both of which were subsequently merged into SMBL. “We have a national presence so it takes time to propagate and implement the same values throughout the organization”.

he highlights that not only are the courts understaffed. you cannot expect zero defaults.” said Manzoor. other institutions need to be developed to cater for their long-term financing needs. Manzoor asserts small and medium-sized banks must find niches within which to concentrate and expand. a drive the Bank’s President says will continue in efforts to serve existing clientele better but also to initiate the unbanked populations of small towns into the fold. Recovery laws and private sector lending Voicing the concern shared by most bankers. is close to seven percent which is about twice that of some of the biggest banks in the country. Soneri Bank has undergone significant changes internally since Manzoor took its helm. and the current lending rates are not low enough for sustainable consumer lending at the moment. instead of dabbling in T-bills. “We have over 220 branches and our product portfolio rivals that of even larger financial institutions. contended President Soneri Bank.” he said. the average age of our management is lower yet their diversity in experience has increased”. the domestic retail sector is home field for the Bank. He contends that even after a decree from court. default suits borrowers because they can bank on dragging out the ensuing lawsuit through the courts for years on end. Soneri Bank is clearly not ratcheting up its consumer lending portfolio anytime soon.Laid back banking is not an option for smaller banks Mohammad Aftab Manzoor | President. 2013 Page 27 . barring a sudden change in interest rates. In his initial assessment of the Bank. Listing out the hurdles to expeditious settlement in the legal system. Since Soneri Bank has made steady inroads among local businesses. INTERVIEW BY: ALI KHIZAR AND SIDRA FARRUKH BANKING REVIEW 2012 / January 28. Soneri Bank has stepped up efforts to mobilize deposits while agressively working on lowering its cost of funds as well as maintaining its administrative expenses at the current low levels 220 BRANCHES ADDED SONERI BANK HAS OVER He concedes that “no sector is large enough for a bank to solely focus on it and the harsh conditions faced by business in lieu of security and energy make it hard to lend to banks”. He insists that the Bank has not been reluctant in lending to viable businesses. as Manzoor warns that another economic crisis in the country could imperil the existence of smaller financial institutions. centralization of activities and procedures have been implemented to improve efficiencies and streamline operations. half the job of management is already done. Manzoor also called for legislation to slam down on credit offences as major offences. at times a lack of understanding of banking procedures. “When you are lending to the private sector.” He contends that while the commercial banks lend to businesses in lieu of working capital requirements. The banks cannot afford to be too aggressive though. to increase awareness regarding its range of product offerings. banks face further hurdles to recovery when they attempt to enforce the court’s decisions. But the Bank President insists on aggressive private sector lending in an environment where most banks are content to buy Government debt. “there is. according to him. Small numbers do not justify the costs. “The law and order situation and energy challenges are the biggest deterrents to business activity. He insists that recovery laws must be reframed to favor honest businesses and to discourage willful defaults which strain the banking system and reduce avenues of financing for hard-working and deserving enterprises. eighteen months after initiating this drive. highlighting recent moves to inject “fresh blood” into the Bank. Manzoor honed in on the need to revamp its human resources and introduce modern technologies and procedures to improve efficiency. specialized bank”. while the final verdict usually mandates only partial repayment” says Manzoor. Soneri Bank “Laid back banking. “Previously we were mislabeled as a small. “Consumer business is based on volume. says President Soneri Bank. “Although the HR shuffling continues. while sifting redundant resources.” he asserts. He also highlighted that new automated systems.” The processes must be simplified and a concept of turnaround time should be introduced so that there is a definite time-frame for the resolution of recovery cases. The weighted average cost of funds for the Bank. “Right now.” Soneri Bank has enhanced its media footprint of late. is not possible for small and medium-sized banks”.” said Mohammad Aftab Manzoor. “Simple arithmetic dictates that we must lend out against our deposits. Soneri added 25 new branches to its network in the outgoing year. not the interest rate” says Manzoor. NEW BRANCHES TO ITS NETWORK in CY12 25 Sea changes at Soneri Bank Soneri Bank has stepped up efforts to mobilize deposits while agressively working on lowering its cost of funds as well as maintaining its administrative expenses at the current low levels. which the large banks can afford to do. “If you pick the right human resource. but he insists that “banks’ ability to provide term financing is limited at best. he says insisting that this classification couldn’t be further from the truth. he highlights that “the legal system is not conducive for banks to lend aggressively to the private sector because there are so many loopholes and lacunae that defaulters get an easy ride”.

The efforts have lead to build a successful model which has potential to surpass the financial inclusion achieved by its conventional counterparts by countering it unique set of challenges. to include interest-free banking system and full-fledged Islamic banks. Islamic Banking Scheme (IBS) established in 1999.1% US$ parity : 3. Council of Islamic Ideology created on August 1.3 trillion with 500 institutions operating in more than 75 countries of the world. it can be said that they have established their own unique models of Islamic financial system. 2012) WEF 2011 Ranking: GDP Growth Rate 5. foreign banks such as Kuwait Finance House. Malaysia introduced Islamic debt securities market in 1990 and Islamic Inter-bank Money Market (IIMM) in 1994. It is Malaysia’s first Islamic savings corporation. While comparing the journeys taken by these two countries. Al Rajhi and Asian Finance given Islamic Banking licenses. Berhad (BMMB). 2012) WEF 2011 Ranking: 55 16 ISLAMIZATION PROCESS PAKISTAN Objectives Resolution adopted on March 12. MALAYSIA Muslim Pilgrims Saving Corporation (Tabung Haji) established in 1963. In 2005.3% Hindus MALAYSIA PAKISTAN GDP Growth Rate US$ parity : 2. 1999 that laws involving interest would cease to have effect from June 30. we review two countries namely Pakistan and Malaysia and compare their progress in Islamic banking.0425 (as of Dec 3. Bank Muamalat Malaysia Banking practices in parallel with conventional banking sector. 1985 declared un-Islamic by the Federal Shariat Court (FSC) in November 1991. in Pakistan it has only been since 2002 that a practical approach is taken by stakeholders to build a dynamic Islamic finance infrastructure. The first Islamic bank in Malaysia. First international Islamic Interbank Benchmark Rate developed by Thomson Reuters and Association of Islamic Banking Institutions Malaysia (AIBIM) in November 2011. established in July 1983. According to GIFR. Government formed National Steering Committee in 1981 to outline strategy to inculcate Islamic banking industry. which in turn established RHB Islamic bank. 2001.1. Government decided to introduce Islamic to form second Islamic Bank. First Islamic window at a commercial bank appreared at Bank Negara Malaysia in March 1993. Islamic windows of three commercial banks merged On September 4. the global size of the Islamic financial services industry is US$1.1% Christians and 6. Shariat Appellate Bench (SAB) of Supreme Court delivered judgment on December 23. A comparative analysis of Islamic Finance Industry in Pakistan and Malaysia BRIEF HISTORY Independence: 14 August 1947 Population Division State Religion: Independence: Islam 5% Others 31 August 1957 Population Division State Religion: Islam 39. 1962 to make recommendations to bring current laws into conformity with Islamic injunctions.4% Muslims Sunni 75% Shia 20% 19. In this article. 2003. Bank Islam Malaysia Berhad (BIMB). 2013 . The Malaysian model has acquired more sophistication and is more successful considering Malaysia is considered as an international hub for Islamic Finance industry in the world. Hong Leong Islamic bank. The banking procedure adopted by banks in Pakistan since July 1. In 1999.72 (as of Dec 7. It set criteria for establishment of Islamic commercial banks through Islamic Banking Policy 2004.6% Others includes 95% Muslims Sunni 75% Shia 20% includes Christians and Hindus 60. 2001.A TALE OF TWO COUNTRIES Ayesha Ashraf Jangda Islamic Banking has witnessed rapid expansion over the years and can truly be considered a global industry both in terms of geographical spread and asset coverage. 1949 by the Constituent Assembly of Pakistan. 9.2% Buddhists. 1981 to implement interest-free banking. However. Page 28 BANKING REVIEW 2012 / January 28. Maybank Islamic Berhad and Islamic Banking Division established at SBP in September CIMB-Tijari Islamic bank by 2004. Profit and loss sharing banking experiment started in January 1.4% (FY11) 96.

pk BANKING REVIEW 2012 / January 28. banking and finance have been included in the curricula of the following: National Institute of Banking and Finance (NIBAF) is also referred as State Bank Training Center. SZABIST. Ulemas. Academicians such as Dr Shahid Hasan Siddiqui have been writing articles debating the concept of Islamic Banking. Islamic Inter-bank Money Market. not result in financial inclusion of people and its behind the target envisaged by SBP in its strategic plan of 2005. Bay' al-Inah is a sale contract with immediate repurchase. MALAYSIA Islamic banking in Malaysia has been criticized because of its application of bay' al-Inah in creating a number of so-called Islamic financing products. Institute of Bankers in Pakistan International Islamic University. Development Institutions with Islamic services. Their opinion is published in book titled “Murwajah Islami Bankari”. The classical jurists are in disagreement in assessing the legality of the contract. It takes place when a person sells an asset in credit and immediately buys back the asset in cash at lower Muhammad Ali Jinnah University. Corporate Strategy and Business Planning at Bankislami Pakistan Limited.Presence of Islamic Financial Institutions Islamic Banks PAKISTAN MALAYSIA Islamic windows of conventional Banks Takaful Companies Islamic Asset Management Companies Asset Management Companies with Islamic Fund Modaraba Companies Corporate Sukuk market 5 16 12 22 5 8 1 9 15 35 25 - Malaysia also has Islamic Investment Banks. IoBM. DEVELOPMENT AND ACADEMIC RESEARCH PAKISTAN Courses on Islamic economics.ashraf@bankislami. Few local scholars debate and still consider Islamic Banking as not according to the real essence of Islam. such as those from of Jamia Uloom Islamiyah don’t approve products of Islamic Banking. The author is Section Head. Islamic stock broking company Product Size Pakistan Malaysia TRAINING INITIATIVES. The question of whether or not available Islamic banking really is Islamic is still a matter of debate. Malikis and Hanbalis. Another criticism on Islamic Banking in Pakistan is that it has not realized it true potential considering 98 percent of the population is Muslims. the criticism in Pakistan on Islamic Banking is still on rudimentary basis ie. a 12 percent market share by 2012. Jamia tur Rasheed AlHuda Center of Islamic Banking and Islamic Economics (CIBE) Business schools. She can be reached at: ayesha. LUMS.D Shariah (Islamic Law & Jurisprudence) and has Islamic Research Institute and Shariah Academy Center of Islamic Economics a division of Jamia Darul Uloom. Islamabad offers Ph. IBA. It was prohibited by majority of jurists including the Hanafis. PAF-Kiet among others MALAYSIA Training Institutes which inculcate education of Islamic finance are as follows: International Centre for Education in Islamic Finance (INCEIF) Malaysia’s global university of Islamic finance International Shariah Research Academy for Islamic Finance (ISRA) which promotes applied research in Shariah and Islamic finance Islamic Banking & Finance Institute Malaysia (IBFIM) Asian Institute of Finance (AIF) Institut Bank-Bank Malaysia (Institute of Bankers Malaysia) Islamic Banking and Finance Institute Malaysia Malaysian Insurance Institute CRITICISM ON ISLAMIC BANKING PAKISTAN Unfortunately. but allowed by Shafis. 2013 Page 29 .

Ijara Sukuk is the only option available to Islamic banks. “Relaxation in the minimum rate to be offered by Islamic banks to depositors is not likely to drastically reduce the cost of borrowing for the banks”. Bank Islami INTERVIEW BY: ALI KHIZAR AND MOBIN NASIR Page 30 BANKING REVIEW 2012 / January 28. the old school way Back in 2010. asserted the BIPL President.Bank Islami Inefficient real estate market a big impediment to mortgages Bank Islami (BIPL) is the second biggest Islamic bank in the country. Our product offerings. The Bank has continued endeavours to enhance its branch network in the outgoing year. reach. 2013 . After consolidating operations over the next three years. “In the short-run. Since Islamic banks actually own the asset which they lend against. while private sector credit offtake has been sluggish due to exogenous factors. “About half of our branches are in villages and peri-towns including some areas where even the biggest banks are not present” he said. “we have grown organically without any mergers and acquisitions. Hasan Bilgrami cites these as the core reasons due to which the country’s Islamic banks are so far the dominant players in the home loans segment. said Bilgrami. Bank Islami Pakistan Limited doubled the size of its portfolio. so the experience proved to be a win-win situation for all key stakeholders. we have exhibited higher growth throughout our existence”. adding that Bank Islami has brought many new uninitiated people into the formal banking fold because of this presence. In a recent interview with BR Research. He also highlighted that deposits across Islamic banks have grown by an average of about 30 percent each year. unlike those institutions advances by Islamic banks are growing in absolute terms. Hasan Bilgrami President. rates. ‘We made it economically attractive for the clients so they were happy while at the same time. He highlighted that the Bank has been able to draw many customers away from conventional banks due to its competitive product offerings. BIPL President Hasan Bilgrami pointed out. as it became the world’s first Islamic bank to acquire the home loans portfolio of a conventional bank. We have broken that mould and have been able to convince these unbanked people to use Shariah-compliant banking services”. in terms of deposits as well as number of branches. Islamic banks have limited ability to hedge against falling rates”. so banks are unable to really expand this portfolio even though they would want to” he pointed out. Bilgrami revealed that the conversion of that portfolio has now been completed. BANK ISLAMI 39 NEW BRANCHES in CY12 Not an apologetic competitor “Our value proposition is not limited to the fact that we are an Islamic bank. “We judge each application based on the personal relationship and history of the applicant. The Sukuk situation The Bank President highlighted that on the investments front. market penetration and overall customer experience rival any of the other financial institutions operating in the country”. “The real impediment to a vibrant market for home loans is that the real estate market is quite inefficient. yet in comparison to our peers. 30 percent GROWTH per year Consumer lending. “There are many people who have traditionally stayed away from banks because they consider these institutions un-Islamic. the maximum rate offered by Islamic banks and windows to any depositor cannot be more than thrice the minimum rate offered by the same institution. instead of relying on the same laundry list for everyone” said the BIPL President. recovery is also not as cumbersome for them as it is for conventional banks. rates offered to depositors may drop but over time they will match the industry-wide trend” said Bilgrami. Given its aggressive stride. contended Bilgrami. Bilgrami contended that the legal environment in the country is not conducive for banks to roll out such loans. He explained that under the new regulation. But BIPL has taken a personal approach to building its home and car loans portfolios. Bilgrami contended that while the ratio is lower than conventional banks. subject to SBP approval” revealed Bilgrami. Then foreclosures are not easy to implement here. while conventional banks can invest over various tenors through T-bills and PIBs.” While BIPL is active on the home loans and car loans front. 26 branches in 2007 and another 66 in the next year. adding 39 branches in CY12. “Hence while they can manage rates quite effectively. adding that this will distinguish BIPL “as the second biggest Islamic bank in Pakistan”. Bank Islami achieved a unique distinction globally. ‘We hope to add another 60 branches next year. Citibank. in CY12 the Bank has once again resumed the extension of its network. He recalled that BIPL added 10 branches in 2006. since its inception. the Bank has churned out a consistent pace of 30 percent growth per year. When quizzed over the Bank’s ADR.

registering a 80 percent increase in deposits in 2012. BRR: What are the consumer products that Burj Bank offers? AK: We have been offering car financing for a little over year. We are also conducting research to assess the feasibility of home financing. How do you cope with it in the current low interest rate scenario? AK: Yes. The core function of all banks is lending. We have started with non-transactional services on cellular phones and will provide transactional services from next year. the deposits are coming in but we have to be careful at what cost they are coming in. At the same time. the delinquencies under this head are under one percent. We are working with the SBP to create more instruments. Subject to approval from the State Bank of Pakistan. but in banking we are in the business of taking intelligent. We have done well on this front. Banks should be creating assets by building advances so that it generates a healthy economic cycle. There is demand from the private sector but banks have to put in the effort to differentiate a good bet from a bad one. especially the lending part. Naturally. So far. BRR: How much of an impediment is the lack of avenues on the investment sides? AK: It is an impediment as we only have Sukuks to invest in. lending to the private sector comes with risks. we intend to compete with all other banks. Last month we financed about 300 cars and have also signed an agreement with Honda to facilitate car buyers. as long as the equities are also Shariah compliant. which is one way of bringing the unbanked under the banking umbrella. building deposits and bringing the cost of funds down at the same time. But that is not the only way. After all. Some of our peer banks have been quite aggressive in rural areas. We believe that Islamic banks have an inherent advantage in these realms because asset-backed lending makes it easier to deal with recovery issues. We have worked hard on risk management and as a result. there is still business in the private sector amongst the blue chip companies. We are also considering alternative distribution channels. we have brought down the cost of funds. Based on this. It pursues an ambition of reaching new heights and achieving distinction in Islamic Banking by becoming a symbol of prosperity. BRR: Deposit creation is not much of an issue but building the asset side is. There is a dearth of Islamic instruments globally. We have grown across the country and have a very healthy ADR of 63 percent. On the flipside. but that is not a Pakistan-specific phenomenon. But we are expanding cautiously on this front. which is what we have done. the core function of all banks is lending. We believe opportunities still exist in trade finance and consumer lending. including mobile banking. It is very easy to invest in government securities when the interest rates are high. our NPLs are significantly lower than the industry average. Gargash Enterprises from the UAE and Al-Romaizan from Saudi Arabia. Ahmed Khizer: Burj Bank is the fastest growing Islamic Bank in Pakistan. our NPL’s are significantly lower than the industry-average BURJ BANK ADDED 25 DEPOSIT GROWTH PERCENT IN CY12 BRANCHES IN CY12 80 63 PERCENT BANKING REVIEW 2012 / January 28. Other major shareholders include Bank Al-Khair from Bahrain. BRR: How have deposits and advances for the Bank performed in the outgoing year? AK: The deposit growth has been phenomenal. But that is not what the banks are there for. registering a significant increase over the 50 branches that were present at the beginning of 2012. but we will continue monitoring the portfolio as it matures. We also invest through equity placements as these are permissible under Shariah. Another way is to tap those residing on the outskirts of major cities like Karachi. We are providing cash management and investment banking services to large corporates and building clientele in the SME sector at the same time. Our Board of Directors has approved a five-year plan which envisions rapid expansion. BRR: What is the mix of your branches in terms of geographical placement? Some of the banks are focussing heavily in the rural segment from the financial inclusion angle. Burj Bank BR Research: Briefly relate the vision of Burj Bank and its plans for the near future. Jeddah. not just the Islamic banks. We have a rich Middle Eastern background with the support of ICD Jeddah (Islamic Corporation for Development of the Private Sector) which is the private sector arm of Islamic Development Bank. Our service quality is the key differentiator. not investing in government paper. What is Burj Bank’s view? AK: We follow the standard 2:1 urban rural ratio. 2013 CY 12 ADR INTERVIEW BY: ZUHAIR ABBASI AND MOBIN NASIR Page 31 .Banks must make efforts to differentiate a good bet from a bad one Ahmed Khizer President. We added 25 branches to our network in the outgoing year. progress and success. it does not spur the economy. not investing in Government paper. we intend to add a similar number of branches to our network in 2013. We have worked hard on risk management and as a result. prudent and properly evaluated risks.

in the United Arab Emirates 22 percent of the banking sector is occupied by Islamic banks. Saadiq clients can utilize teller services at all Bank branches in the country. while another 36 conventional branches offer Islamic windows. In a recent interview with BR Research. Total deposits held by Islamic banks in Pakistan have registered an impressive growth in recent years.” he added. All that is needed are the right tools that are in line with religious considerations. Islamic banks can provide some solutions like Murabaha for export financing. from mass-market retail banking to international private banking.” he said adding. Standard Chartered Bank. “I believe we owe it to our customers to collectively work towards providing Islamic solutions for such needs so that they can exercise their choice of opting for Islamic banking. but cannot lend for working capital requirements.” He contended that since Islamic banks are limited in their ability to offer personal finance solutions to clientele. noble consideration that our religion discourages people from taking on debt to fund consumerism. while another 14 36 conventional branches offer Islamic windows Wasim Saifi rejoined Standard Chartered Bank in January 2011 as the Global Head of Islamic Consumer Banking. regulators must work on providing a wider range of services Wasim Saifi | Global Head of Islamic Consumer Banking. and this sector can boom within the next few years. The penetration of Islamic banks in other countries is significantly higher than in Pakistan. We would not be surprised if 5-7 years down the line. That is the only way the industry is going to develop further in the country.” said Wasim Saifi. Wasim called on the banks and regulatory authorities in Pakistan “to re-evaluate what is permitted under Shariah structures with a view to developing Islamic banking in the country and increasing its penetration. “but regulators have to be mindful that this door is wide open for conventional personal finance.Islamic banks. he said. “In Malaysia.” pointed out the Islamic banking expert. remain unable to do so since all their needs cannot be met by that institution. he was also appointed as Chief Executive Officer of Standard Chartered Malaysia’s wholly-owned Islamic banking subsidiary Standard Chartered Saadiq . along with regulations that allow Islamic banks to expand their array of product offerings. Standard Chartered Bank “There is a pressing need today. Global Head of Islamic Consumer Banking. while in Saudi Arabia the entire banking sector is on the verge of turning over completely to Islamic mode. while the Islamic banks do not have commensurate mechanisms. So a business will not receive end-to-end services like it could receive from the conventional banks” he said. Wasim asserted that the Bank is “bullish on Islamic banking in Pakistan. We even have Shariah-compliant NOSTRO accounts in Euro and US Dollar. “Besides. but Wasim contended that. He had earlier served the bank for 17 years in Mumbai. without hassle or fear of losing out on critical services which they expect from their bank”. We offer comprehensive services to SMEs including an electronic platform for trade and cash management.” he said. “In terms of business finance. in Kuwait it is over 40 percent. “It is a Standard Chartered Pakistan has set up Saadiq branches in the country. to open up avenues for Islamic banks by ways of asset creation and liquidity management. While conventional banks can park funds in Treasury bills. “In the international space. the Islamic banks can only invest funds in Sukuks which have a three-year tenor and are re-priced every six months. a third of the banking sector in Pakistan is controlled by Islamic banks. the challenge facing this industry is on the front of asset deployment. so this is a huge market.” This comment alludes to the limited investment opportunities available in the country for Islamic banks. In July 2012. Highlighting the strengths of Standard Chartered in the Islamic banking arena. “Pakistan has one of the world’s largest Muslim populations.” He pointed out that Standard Chartered Pakistan has set up 14 Saadiq branches in the country. many individuals and businesses that would prefer to inculcate a relationship with an Islamic bank. 2013 .” He urged banking sector regulators across the Muslim World to work towards providing an enabling infrastructure. we are the only bank with end-to-end Islamic banking on our platform. Pakistan Investment Bonds and other debt instruments with diverse tenors.” INTERVIEW BY: MOBIN NASIR AND SOBIA SALEEM Page 32 BANKING REVIEW 2012 / January 28. “in Pakistan. adding that in Pakistan this number is still in single digits. If better opportunities were available there. we would be even more aggressive with our expansion plans. Dubai and Colombo. this number stands at 24 percent.


Traditionally. Economic growth and job creation can be stimulated. Other services. microfinance helps not only to empower women but also enable them to participate in economic activity. as access to finance. within a few years. poverty alleviation was considered to be a charitable function and NGOs and donor provided subsistence to the underprivileged. who can utilize the funding to finance their businesses. particularly developing economies. education. Microfinance as a tool and mechanism for poverty alleviation has enormous potential and needs to be well understood. microfinance has been recognized as an effective development intervention for at least four basic reasons. acquire household assets. can enable them to build assets. • The institutions that deliver these services can develop. public policy and actions can. fund emergencies and social obligations. • These services can make a significant contribution to the socio-economic status of the targeted community. there has been a paradigm shift and policy makers are of the opinion that poverty can only be eliminated by providing means of earning livelihood to the poor. improve consumption. • Services provided can be targeted specifically at the poor and poorest of the poor. into sustainable institutions with growing outreach. and must eliminate poverty.Micro Finance: an effective anti-poverty tool Sajjad Hussain Poverty stands as a towering challenge for the global economy. in the form of saving and credit in the hand of poor. Page 34 BANKING REVIEW 2012 / January 28. but poverty is not unassailable. as small business development and access to housing finance generates new cycles of accumulation and contributes to higher levels of effective demand. It is an unacceptable human condition. and invest in health. In the past decade. Microfinance refers to the provision of a whole range of financial services to low income earners. “Don’t give me fish tell me how to catch the fish". • By supporting women’s economic participation. Poverty can be reduced. 2013 . But in more recent times. while governments launched income support programs more because of political clout than anything else. such as insurance provide reasonable certainty to the income of the poor and reduce their vulnerability to economic shocks.

mainly because of high transaction costs and lack of expertise to handle this kind of loans. small size of loan. MFIs need relationship managers with experience and knowledge of local economic structures. while the rest is invested in government securities. Priority actions include: • Developing a supportive policy and legal environment to encourage the entry of new MFIs • Simplifying regulatory. loan quality and leverage and effective rate of interest Working with the population at the bottom of the economic pyramid requires unique skills. In other comparable regions the same ratio ranges between 50 and 150 percent. infrastructure facilities. small size of each loan. They should be able to differentiate between social assistance programs and sustainable microfinance operations. They will have to increase the average loan size to remain sustainable. but only one element of the value chain. FWBL has a big opportunity but a lot of home work needs to be done. We must not forget that financing is only one component. financial inclusion program. while none of the commercial banks or leasing companies has created a specialized microfinance subsidiary. the Government. cannot be overemphasized. Eight MFBs have been established. you will never find two small businesses exactly alike as in the game of “bridge” two identical hands are never received. the MFIs are barely scratching the surface of overall demand. The importance of microfinance. So far. To address these challenges. But our MFIs are still unprofitable because they are highly under-leveraged. and two of the world’s largest MFIs have started operations in Pakistan. therefore. a couple of them have ventured into this market. Remember. they consider it as a losing proposition. • Enhancing the consumption power of the poor. The technical and institutional support mechanism. The current outreach of two million borrowers is less than 10 percent of the potential market. The relatively small loan size compared to high transaction costs makes the proposition unviable for MFIs. Structuring of loans has to be cognizant of cash conversion cycles. no matter how many million hands you have played. supervisory and tax requirements • System should be able to accommodate different institutional structures • Developing industry performance standards and a clear financial reporting system that encourages sound management and financial responsibility of MFIs Photo courtesy: Alana McConnon. Only 40 percent of their balance sheets are used for loans. The main challenges faced by micro inance providers are high transaction cost. technological absorption. including transformation of three microfinance institutions. institutional strengthening fund and microfinance credit guarantee facility. the Government of Pakistan promulgated Micro Finance Ordinance 2001. mainly because of high transaction costs and lack of expertise to handle this kind of loans Currently. From the cost structure we are at par with South Asian providers and much lower than developed countries. the human resources development challenges in microfinance are different from other sectors. more transparent. and took a number of other initiatives like. though very critical. BANKING REVIEW 2012 / January 28. As such. limited outreach. limited product and services. and how it can contribute to the national economy and welfare. In Pakistan out of 18 million people about 30 percent are living below the poverty line. Google images • Incentives/disincentives for commercial banks to provide microfinance • Special emphasis on human resource training in the specific fields of operations Commercial banks are traditionally reluctant to finance small loans.Microfinance in Pakistan has come a long way since 2000 and is gradually mainstreaming into the formal banking system. • Generation of massive employment opportunities for the poor and under privileged. Instead of considering this an additional opportunity for investment. The average loan size in Pakistan is around Rs15. We must understand that there are two pre-requisites to ensure that the benefits of growth reach the poor. central bank and tax officials must be clear about what microfinance is all about. Sajjad Hussain is a former banker and has taught at the Institute of Bankers Pakistan. He holds a Masters Degree from Government College University Lahore and MBA from California. Commercial banks are traditionally reluctant to finance small loans.000 which is 30 percent of the domestic per capita income. He can be reached at: sajjad_100@hotmail. The pattern of growth in our country has always been pro-elite and pro-rich which has resulted in lop-sided growth of the national economy. To drive holistic efforts towards poverty alleviation and inclusive growth. the microfinance sector needs to be more innovative. and last but not the least well-trained human resource must all complement and supplement financing. USA. Banks ought to view financing the poor not only as a social service but also as an additional opportunity for profitable investment. more institutionalized. business activities and the social environment. SBP introduced Prudential Regulations for MFIs. Microfinance market is dominated by women entrepreneurs. Being cognizant of this fact. therefore. more efficient. 2013 Page 35 .

“Our clients are mostly operating educational institutions. “We have given this aspect much thought and at the moment we are approaching the expansion of our car loans portfolio quite cautiously”. said Sultana. This way. we are not only giving them the seed capital to start their own ventures. Once the transformation is complete. Shafqat Sultana. clothing and apparel outlets. In the upcoming year. in a recent interview with BR Research. “in a country where women face many hurdles in entering the work force. Emphasizing the Bank’s niche. check account balances and make transfers online. we are also developing the relevant skills to maximize their chances of success” said Shafqat Sultana. The Bank is also gelling insurance plans with its existing offerings of educational and healthcare loans. “We are looking to expand into cities beyond Karachi. First Womens Bank conducting training courses for women will be the second bank in the who come to us for business loans. But the Bank is bullish on its upcoming gold deposits product. we have provided jobs to scores of young professional women. “We are really looking forward to the introduction of branchless banking because women are often hurdled by mobility issues and cannot make frequent trips to a branch. the Bank intends to launch into branchless banking. seed capital to start their own ventures. “Under this offering. after National Bank of way.Unaffected by slowdown in private sector credit offtake: Shafqat Sultana | President. helped thousands others set up their own businesses and provided distinguished performers to the corporate sector”. beauty salons. “We have partnered with UNIDO and SMEDA this year. There is still much ground to be made up before the Bank can meet the minimum capital requirement mandated by the State Bank of Pakistan. Yet the Bank expects to break past Rs100 million in profits for CY12. small and micro agriculture and horticulture busineses and food outlets” highlighted President FWBL. and together we are conducting training courses for women who come to us for business loans. and together we are precious metal. Once the product is rolled out. INTERVIEW BY: ZUHAIR ABBASI AND MOBIN NASIR Page 36 BANKING REVIEW 2012 / January 28. 2013 . “All of these sectors have been performing quite well even as other sectors of the economy have registered little or no growth”. But the Bank is not keen on expanding this portfolio given the current economic conditions. Lahore and Islamabad so the expansion in the branch network will lead us into new markets. She also added that deposits have grown from Rs12 billion to Rs18 billion over the same period. she said expressing hope that the product will be well received by women who often keep a major portion of their “We have partnered with UNIDO and savings in the form of this SMEDA this year. “As we expand. “We have ended the year with over Rs10 billion in advances” revealed the Bank President. we will try to develop a larger spectrum of offerings that can be availed without having to come into a branch”. we are also developing the relevant skills to maximize their chances of success” RUPEES But FWBL is not entirely immune to the macro economic conditions of the country. The Bank added four new branches to its countrywide network in CY12. dues and receipts without making the trip” contended Shafqat Sultana. RUPEES TOWARDS SELF-SUSTAINABILITY Advances Growth 09 BILLION 10 BILLION RUPEES Advances by the Bank had hovered just under Rs9 billion at the beginning of 2012. albeit a limited scale. there is no slowdown in the private sector credit offtake. Sultana stressed. The consistent reductions in the discount rate have thinned the spreads for the Bank. impacting profitability in the outgoing year. we are not only giving them the Pakistan with such an offering. said the Bank President. people can deposit their gold with the Bank and obtain advances against these deposits”. clients will be able to pay utility bills. Deposits Growth 12 BILLION 18 BILLION RUPEES CAUTIOUS ON CARS. In the initial stages. 10 branches. BULLISH ON GOLD FWBL has offered car loans for some years. which would swell its network to 52 branches. Shafqat Sultana. Branchless banking will let them keep a regular check on their accounts. First Womens Bank FWBL IN 2012 As far as the First Womens Bank (FWBL) is concerned. The head of the Bank also highlighted some unique strategies adopted by FWBL. But the Bank President is sure that the current pace of growth and an accomadative stance by the Government of Pakistan and SBP will ensure its long-term sustainability.” said the Bank President. This country. the Bank is planning to set up another FWBL is currently implementing new automated internal controls.

48 percent and 59 percent respectively.). Easypaisa will continue to contribute to financial inclusion for everyone and help to impart the benefits of mobile financial services to every Pakistani. This number is twice the total number of bank branches. opportunities for rural women and an increase in employment by 2020. which is a unique savings and life insurance product. the State Bank of Pakistan introduced its Branchless Banking regulations in 2008. 2013 Page 37 . completely free of charge. BANKING REVIEW 2012 / January 28. Since launch. But then.000 Easypaisa shops across 700 cities in Pakistan. Later. Easypaisa now has a network of more than 20. a new brand with the name Easypaisa was introduced in 2009 with the shared vision to bring financial inclusion to the people of Pakistan. In three years. Millions of Pakistanis were resorting to informal. undocumented financial services and many more had absolutely no access to financial services. Pakistan. prompting competitors to step into this new industry. mobile financial services presented itself as an incredible opportunity for financial inclusion. CGAP labeled Easypaisa as the third biggest mobile money service in the world. 71 percent of the adult population can be reached through mobile financial services by 2020 thereby bringing them into the banking mainstream. making financial inclusion a huge challenge for the country. Easypaisa now has a network of more than 20. In partnership with Telenor Pakistan. offering banking products (lending. Tameer Micro Finance Bank took the initiative and received the first Branchless Banking license. Easypaisa introduced mobile accounts.Financial inclusion landscape in Pakistan Roar Bjaerum In 2009. the focus will be more on expanding the product portfolio. in terms of customers. One of the targets for Easypaisa is to bring 10 million Pakistanis into formal banking net by 2015 thus contributing to the projected increase in GDP by the BCG Study. anywhere. making it the largest financial services network in the country. almost every household had a mobile phone with more than 100 million SIMs in the country. Termed as one of the most robust and progressive frameworks developed for financial inclusion. and four times the number of total ATMs in the country.000 Easypaisa shops across 700 cities in Pakistan. The study proposed that mobile financial services can lead to increased healthcare. The mobile financial services industry in Pakistan is definitely set to see some exciting times ahead as competition increases and the ecosystem continues to progress and evolve. The main reasons identified for the low banking penetration in Pakistan were a lack of convenient and accessible banking infrastructure. Another study was conducted by the Boston Consulting Group in 2011 on the impact of financial services in Asia. These Over-the-Counter (OTC) services included bill payments and money transfers and top up services. Easypaisa has carried out nearly 100 million transactions with the total throughput of more than Rs200 billion. Easypaisa introduced the Khushaal product. Recognized as the innovator in mobile financial services. the regulations allowed for banks to work with telecom companies and build a mobile financial industry in the country. In 2012. More than 1 million new mobile accounts have been registered across the country and nearly 4 million Pakistanis walk into Easypaisa shops to carry out their financial services every month. This number is twice the total number of bank branches. In three years. For Easypaisa. with their marketing campaigns and their retail footprints. The future of mobile financial services is exciting as the new entrants will help the eco-system grow. This number was especially surprising because countries in the same region like Bangladesh. the World Bank carried out a study and found that only 12 percent of the adult population in Pakistan was actually part of the formal banking structure. The Easypaisa services introduced first were made available through selected retail merchants all over Pakistan. insurance etc. and four times the number of total ATMs in the country. To build a mobile financial services ecosystem in the country. Fiancial Services for Telenor. winning the best Mobile Money launch award by MMT in 2010. The Easypaisa service has been extremely successful in laying the ground work for mobile financial services in Pakistan. savings. In this scenario. India and Sri Lanka had banking penetrations of 32 percent. Easypaisa has been quite successful in its short three-year regime. Roar Bjaerum is the Vice President. With a vision to ‘change people’s lives in Pakistan’. Mobile account users could deposit money or withdraw money from their mobile account from any Easypaisa shop. anytime. while very few people in the country had bank accounts. This study showed that a 3 percent increase in GDP can be achieved through mobile financial services in Pakistan. complete bank accounts opened for Telenor SIM users which enabled the user to make their transactions through their own mobile handset. The partnership came about through the equilibrium of bringing both the bank’s and the telecominucations provider’s respective expertise into the business model. high cost of travel and lack of awareness at the top of the list. making it the largest financial services network in the country. The market has welcomed Easypaisa services and the convenience of mobile financial services has transformed the way the common man lives.

One very appropriate strategy for a lower middle income country like Pakistan could be what India did back in 2006. to evade taxes and keep black money off the radar. the key to avoid a shadow banking crisis. many businessmen do not opt for the formal banking sector. Work on financial inclusion and outreach via technology has been significant especially with proliferating branchless banking across the country. 2013 Illustration by Abdul Musawer Gulzar . While driving around the metropolis. documented assets for collateral. Tedious documentation procedures along with higher appetite for Government credit has made private credit off-take insipid with formal lending to the SME sector in dribs and drabs. Besides these. it is never discussed in the open because of the stigma attached to interest. Grameen and other community-based lending models which involve village banking. MFI or a registered NBFI. These intermediaries could be any suitable local organization. bania. in Pakistan. It needs to be developed and there has to be a liaison. Also. In addition. at least for the sake of the borrowers. “Literacy status can also influence farmers' access to formal credit institutions because literate farmers are assumed to have better technical know-how and information about the market. This is evident from the fact that banking deposits in Pakistan are less than one-third of GDP. Any effort to enhance documentation in the economy. particularly for electronic products. Because of Page 38 BANKING REVIEW 2012 / January 28. It is believed that the amount of money changing hands through these informal means is comparable to that flowing in the formal sector. Who is fulfilling the financial needs of the remaining nearly 85 percent of the population – or more considering not all account holders will borrow from banks – who have not seen as much as the face of a bank teller? It’s the informal lenders. through an undocumented installment plan. Women in Pakistan have also invented a unique informal borrowing method called ‘auntie committees’ whereby women in a particular location pool in a fixed sum every month. In fact. Hasnu in a 2007 research paper on rural credit. Surely from where banks’ private sector credit stands.farrukh@br-mail. it is not uncommon to find more than one owner of a single piece of land. The writer is a Research Analyst at Business Recorder. local foreign exchange agents also sometimes provide loans to people who have insufficient funds to send overseas. According to some studies. Adults with an account at a formal financial institution Pakistan India Bangladesh 10% 35% 40% Adults borrowing from a formal financial institution in the past year 2% 8% 23% Source: The Global Findex Database World Bank Ironically.and post-loan disbursement services. While these kitty parties are more for the reason of social get together. In Bangladesh.fawad@br-mail.” explained Shehla Amjad and S. a general religious aversion towards interest (riba) keeps many people at bay from bank borrowing or putting deposits in savings accounts. the interest rate people end up paying is exuberantly high. The development of parallel debt markets for the corporate sector would be a blessing in disguise for the SME sector. The Reserve Bank of India authorized banks to use various intermediaries to achieve greater outreach of the formal banking sector.A. NGO. While complete transformation sounds irrational and impractical. religious and economic factors explain why informal lending continues to be a leading choice for the borrowing needs of many. the construction and housing market seems to have taken a recovery stroll. low literacy also explains low penetration in the formal sector. there are some more business oriented ‘boli wali committees’ prevalent in small to medium size trader communities that work through an auction process. which is a dynamic game with changing interest rates according to the needs and liquidity of participants. They (also) have a better understanding of bureaucratic procedures involved in the application. with Pakistan’s ill-defined property rights. Informal lending for consumption goods also takes place in the open retail market. leaving banks with more room for lending to the The writer works as Research Analyst at Business Recorder. lies in converging the capacity and structure of the formal sector with the flexibility of the informal sector. and in the case of interest-based informal lending. The term ‘sood khor’ (interest taker) is considered an abuse. physical and bureaucratic barricades. Bringing the informal financial sector under the regulated environment is important. Inroads in the use of formal bank accounts require the removal of financial. developers in the construction industry have backing from shadow banking to be able to create such lofty projects. Many cultural.F. Transforming the informal sector Existence of shadow banking in Pakistan is not an eccentric fear. and the total collected each month is handed over to a pre-decided person or through a lucky draw. credit unions. and even though interest-based informal lending does take place in communities. many established sectors of Pakistan. The Government debt to GDP ratio is double the banking deposits base. Sources of informal lending include friends and relatives.e. but is still in its nascent stage. such as tax amnesty schemes and doing away with legal investigations for money being remitted into Pakistan. partially explaining crowding out of the private sector and reluctance of lazy bankers to reach the informal sector. only about 15 percent have bank accounts.Informal finance: Chasing the shadows Sidra Farrukh and Sijal Fawad Out of a population of nearly 200 million. They had the responsibility of identifying borrowers and conducting pre. Firstly. cooperatives and self-help groups that make small formal loans to the poor. such as that in China. a blend of enforcement and increased access to cheap credit through both licensed and community based loan schemes could also work. could help in increasing banking density. especially in rural and low-income urban areas. the recovery rate of these informal loans is quite high. acquisition and repayment of loans. people do not have legitimate assets to present as collateral to banks. Banks themselves are shy of lending to the general populace because of poor foreclosure laws and inadequate capacity of banking courts which often favor the borrower over the lender. She can be reached at sidra. The uncertain shadows of shady banking and shady business reflect on society and the economy. close to $100 billion. Besides these. She can be reached at: sijal. are not even given overdraft limits by banks because of a lack of legal. Besides this. such as road and housing construction. arthi and landlords in villages. the informal economy of Pakistan is half the size of the formal i.