Assignment # 1

Case Study
KASB Bank Limited: Capital Shortage

Student Name: Waqar Mansoor (62790)

Course Name: SFAD
Term: Fall 2020
Instructor: Dr. Arsalan Hashmi
1. Why was the moratorium placed on the KASB Bank by the State Bank of
Pakistan? Determine the Tier I capital shortage for the years 2012 and 2013
assuming there was no reduction required as per Exhibit 5.

For five-year KASB Bank had continuously reported losses. its losses for 2013
the calendar year was 1,625 MPKR. It has a very high % of the investments and
loans portfolio were nonperforming. So, the bank had been facing capital
shortages in both capital adequacy ratio (CAR) & minimum capital requirement
(MCR).

As End of September 2014, its MCR was about 0.958 billion PKR and CAR of neg
4.63% against the required levels of 10 billion PKR and 10 %, respectively. As
KASB Bank could not meet the SBP capital adequacy requirements and
minimum capital requirement, hence regulatory action by the SBP.

Initially SBP warned board of directors of the bank that as the regulatory
capital had become negative, the SBP would take action if arrangements were
not made to increase the capital base. But even after several warnings has
been given to meet the regulatory requirements, KSAB bank could not meet
the basis requirements.

State bank of Pakistan finally impose moratorium period of 6 month. During

this period KSAB bank cannot pay debt while it can receive payment of loan
and others amounts.

There is net shortage of Tier 1 capital in 2012 and 2013 is 8.4 billion PKR and
10.84 billion PKR respectively.

2. What methods were adopted by KASB Bank management to resolve the

shortage of capital?

Mergers

A series of mergers with other group companies has been decided by the
management and board of directors to meet the State Bank requirement of
capital. Three companies were merged into the bank. International Housing
Finance Limited (IHFL) were merged in 2006, and KASB Capital Limited (KCL), in
2008, which were non-banking finance companies. Network Leasing Company
Limited (NLCL) was merged in 2008.
Issue of Rights Shares:

To increase the capital KASB bank, one billion rights shares has been issued at
a discounted price of 3 rupees per share. That has increased the paid-up
capital from PKR9,509 to PKR12,509 million (net of discount) as of 31
December 2011.

Capital Investment by Asia International Financial Limited

In 2010, restructuring proposal given to Chinese company M/s Asia

International Financial Limited (AIFL) has been given 50 per cent shareholding
against injection of funds in the group holding company KASB Finance Private
imited. But in 2014, SBP objected the changed in ownership structure is
without permission.

Management Initiatives and branch banking

Management has taken various measures to improve performance and

probability. They started monitoring of service quality to the customers. To
increase employee’s moral, training and development, Recognizing and
rewarding people has been started. Improving corporate communication by
introducing new globally recognized banking software. And Reengineering
processes to enhance efficiency.

3. What plan was prepared by the Board of Directors (BOD) to deal with the
situation and what is your opinion of this plan?

After several mergers with non-banking financing companies, KASB was in

difficulty to manage business of scope. They loss focus from holding company
and subsidiary and child companies are not performing well.

Reshaping and recapitalizing plan was prepared to address the capital

deficiency and financial condition. Reshaping the bank through a demerger
process by separating core banking assets from the noncore businesses and
assets. Re-capitalizing the demerged core by either direct equity injection or
amalgamation with another bank.

KASB plan was good but time and circumstances are not with KASB bank. First
reshaping the business was necessary to control and manage core business.
Initially other non-core business increases the capital requirement but after
that these businesses not only loss in business banking scope but also reported
huge losses and hence impacted on KASB bank.

Second step of their plan to recapitalize through direct injection or

amalgamation. But here also time was bad. They could not implement their
plan timely and SBP has did the same plan by merger of bank Islamic. Mergers
and direct injections are the only ways to retain KASB bank.

4. Analyze the conditions prevailing during 2009 to 2014 that affected the
small bank such as KASB Bank.

The banking industry in Pakistan had grown at a compound annual growth rate
(CAGR) of 13.2 per cent over the period 2009–2014. But Minimum capital
requirement has been increasing continuously by SBP during 2008 to 2014. It
was 5 billion PKR in 2008 and continuously increased one billion each year and
in 2013 it was reached up to 10 billion PKR. This was happened to safeguard of
depositor but it become difficult to raise capital by small bank like KASB.

As Basel 3 implemented, the pressure on asset quality and a narrowing of

spreads made the operating environment for banks having a weak financial risk
become more challenging. Asset quality has to be reviewed quarterly and this
was the compliance by SBP. Bank has to be reviewed entire loan portfolio.

On one side they need to increase capital to meet regulatory requirement and
on other hand they need to manage current and enhanced business. That thing
become real challenging to provide return to shareholders.

5. Do you think the State Bank of Pakistan acted impartially in resolving the
KASB Bank situation and what is your opinion of the amalgamation of the
bank into Bank Islami?

Yes, State bank of Pakistan has done right decision of moratorium to take the
rights of depositors because even after various warnings regarding compulsory
requirements, KASB was continuously nonconformance. KASB has tried varies
means to meet the requirements but they failed.

moratorium restrained the bank from payment of certain obligations and

debts while it continued to receive all payments/recoveries due to the bank.
The SBP held discussions with Allied Bank Limited (ABL), Habib Bank Limited
(HBL), Bank AL Habib, Saudi American Bank (SAMBA) and National Bank of
Pakistan (NBP), regarding merger or takeover of KASB Bank Limited. But no
one showed any interest. After that SBP added that four other banks, that is, JS
Bank, Sindh Bank, Askari Bank and Bank Islami, had shown interest in the
possible acquisition of KASB Bank.

To protect the interest of depositors, to protect employees job, as well as to

ensure the stability of the banking, and trust of common peoples,
amalgamation of KASB Bank with and into Bank Islami Pakistan Limited was
was an good solution. No big bank is in interested in KASB only small banks are
interested. Bank islami is also in difficult time and after merger with KASB both
banks are become strong hence stability of financial system is maintained.

Other option is to close KASB bank but it cost of employment, and hurt the
trust on banking systems of the nation. So Decision by SBP was right.