Consumer banking in Pakistan

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Consumer banking in Pakistan

  1. 1. Consumer Behavior Program: MBA (Evening) Submitted To: Sir Abdul Qayyum Qureshi Submitted By: Muhammad Tayyab Roll # 111405 Pak-AIMS (Institute of Management Science Consumer Banking in Pakistan
  2. 2. 2 Consumer Banking in Pakistan (Consumer Behavior) Introduction: In Pakistan all banks & DFI‘s works under the supervision of the State Bank of Pakistan, the four major sectors in which SBP has divided banks operations are Corporate, SME, Agriculture and Consumer. SBP provide regulations according to which all banks should work & continuously keep a track that banks are complying through the regulations or not. In recent years, Consumer Banking has made tremendous progress and has played a positive role in boosting the economy and in meeting the needs and requirements of the consumers. Whether large or small bank, multinational or local, each one of them is geared towards making its mark in an already competitive environment that is the outcome of consumer banking. The growing economy and further improvements in the level of household income have created many opportunities for consumer banking. History of Banking in Pakistan: Banks in Pakistan also exhibiting symptoms of similar financial malaise caused by extensive liberalization, as are their counterparts in the West? Not quite. Pakistan‘s experience with financial liberalization in the banking sector is vastly limited as compared to the developed world. A brief look at the history of banking in Pakistan reveals that the banking sector has made impressive achievements but still has a long way to go. Humble beginnings, 1947 – 1970 Our financial sector evolved very differently from banks in the developed world. For nearly a year after partition, Pakistan had no central bank. Habib Bank – established in 1941 – filled this gap initially, until the State Bank of Pakistan (SBP) was set up in 1948 under quasi-government ownership. The role of domestic banks was particularly limited at the time, accounting for only 25 of the total 195 bank branches in the country. Therefore, the SBP was initially mandated to develop commercial banking channels, and maintain monetary stability so trade and commerce could flourish in the newly-created state. Subsequently, Habib Bank, Allied Bank and National Bank were amongst the first to start operations with strong support from the central bank. A legacy of public control, 1970 – 1980 Commercial banking grew favorably in Pakistan until 1974. Under the nationalization policy implemented by Zulfikar Ali Bhutto‘s government, thirteen banks were brought under full government control, and consolidated into six nationalized banks. The Pakistan Banking Council was set up to monitor nationalized banks, marginalizing the SBP‘s role as a regulator. These measures were meant to improve lending to prioritized industries. However, while directed lending was viewed favorably at the time, little can be said of the long-term gains that have been achieved. Business as usual, 1980-1990 Over time, the financial sector grew to serve primarily large corporate business, politicians and the government. Board of Directors and CEOs were not independently appointed. Lending decisions were not always commercially motivated, and many billions of rupees were unsurprisingly funneled out of the financial system as ―bad loans‖. Banks were essentially not in control of their destinies during this period.
  3. 3. 3 Consumer Banking in Pakistan (Consumer Behavior) Privatization, 1990 – 1997 By 1991, the Bank Nationalization Act was amended, and 23 banks were established – of which ten were domestically licensed. Muslim Commercial Bank was privatized in 1991 and the majority ownership of Allied Bank was transferred to its management by 1993. By 1997, there were still four major state-owned banks, but they now faced competition from 21 domestic banks and 27 foreign banks. More importantly, administered interest rates were streamlined, bank-wise credit ceilings removed and a system of auctioning government securities was established, forcing the government to borrow at market determined rates. Ushering in the reforms, 1997 – 2006 After privatization, transformational reforms were pushed through. The central bank‘s regulatory powers were restored via amendments to the Banking Companies Ordinance (1962) and the State Bank of Pakistan Act (1956). Subsequently, corporate governance, internal controls and bank supervision was strengthened substantially. Legal impediments and delays in recovery of bad loans were streamlined in 2001. Furthermore, the scope of prudential framework set up in 1989 was enhanced, allowing banks to venture into hitherto untapped business segments. Lending to small and medium enterprise had previously been neglected, whereas consumer and mortgage finance had not developed prior to reforms. The post-reform era, 2006 – present Buoyed by the spirit of liberalization, the sector‘s landscape has changed significantly. By 2010, there were five public commercial banks,25 domestic private banks, six foreign banks and four specialized banks. There are now 9,348 bank branches spread throughout the country, catering to the needs of some 28 million deposit account-holders. Banking in Pakistan – the long journey ahead Much still remains to be accomplished. In the absence of sustainable economic growth, banks will remain vulnerable to business cycle fluctuations. As recently as 2008, non-performing loans increased sharply in response to the preceding years of easy credit and risky consumer lending practices. Moreover, strong regulation will continue to be required so as to maintain the delicate balance between industry concentration and competition. Presently, the top five banks account for about 50% of the sector, measured in terms of total advances. Finally, the benefits of financial liberalization must trickle down to the common man. Banks are proactively exploring new business models to make this happen – such as branchless banking. But more headway needs to be made before existing deployments – such as Tameer Bank‘s Easypaisa or UBL Omni – reach a critical mass of users. Reforms have helped banks come a long way, but unless the central bank remains autonomous, and continues to err on the side of caution, liberalization may quickly become a bitter pill to swallow.
  4. 4. 4 Consumer Banking in Pakistan (Consumer Behavior) Consumer Banking in Pakistan Consumer banking which is one of the fastest growing sectors of Pakistan Banking Industry is also now major interest point for the banks. Initially the consumer banking sector was only focused by the foreign banks but its efficiency & profitability attracted others to come towards this business but still the major share of consumer banking in Pakistan is in the hands of foreign banks. In a generic sense, institutional arrangements that provide consumers with financing support to enhance their consumption and as a result thereof, improve their standards of living should fall within the broad definition of consumer finance. For the past 50 years commercial banks in Pakistan had completely ignored consumer financing as an activity. Consumer banking is a huge industry with great profits massive potential for improving economic conditions. But the banking sector has to care more for its subscribers rather than solely about itself. It needs to offer itself. It needs to offer better services at better terms and needs to inform the consumer completely and fully about the services. According to an analysis, credit cards loans have increased from Rs33.538 billion during first of last calendar year to Rs42.822 billion during first half of current calendar year. Likewise, personal loans have increased from Rs120.517 billion in H1CY06 to Rs142.373 billion in H1 CY07. Growth in auto loans has not been less impressive. It registered an increase of approximately Rs8.0 billion from RS97.777 billion to Rs105.444 billion during the corresponding period of growth of credit cards and personal loans. Housing loans have also registered an increase of approximately Rs11.0 billion in H1 CY 07 from Rs43.205 billion in H1 CY06. (Sharif, 2007) Exposure per borrower Rupees in 000 2004 2005 2006 Credit Cards 23 26 32 Auto Loans 423 430 411 Consumer Durable 37 29 22 Mortgage Loans 1572 1982 2025 Other Personal Loans 82 89 100 (SBP, 2006) Figure 2.1
  5. 5. 5 Consumer Banking in Pakistan (Consumer Behavior) Consumer Financing Share by Sector(SBP, 2006) Amount of Consumer Financing (SBP, 2006)Figure 2.2 Figure 2.3 NPL Ratio of Consumer Financing (SBP, 2006) Auto Loans In Pakistan auto loans are purchase of brand new or used, imported or local cars for private use. Auto financing and auto leasing both facilities are offered by most of the banks. Salaried Persons/Self Employed Professionals / Business Persons who meet the terms and conditions to qualify for the finance are eligible for the loan. Some banks are also offering both variable rate & fixed rate options for auto loans. The average market rate for auto loans is 14-16%. Home Loans The loans taken for Buying, Building or Renovating of house/land are classified as home loans. For home loans both variable rate & fixed rate options are also available. The maximum duration offered by banks for home loans is generally twenty years that‘s why banks conveniently give loans to permanent employees of any firm to ensure strong repayment ability. Personal Loans
  6. 6. 6 Consumer Banking in Pakistan (Consumer Behavior) Personal Loans are generally unsecured type of loans but in certain cases when the amount of personal loans increases the normal limit its remaining portion must be secured. Personal loans include loans for the purpose of education, marriage, purchase of consumer durables, furnishing, traveling, etc. Generally the limit for personal loans is maximum Rs.500, 000/- Credit-Debit Cards Credit Cards mean cards which allow a customer to make payments on credit. Supplementary credit cards are considered part of the principal credit card. Initially only foreign banks are offering credit cards in Pakistan but now many local banks is also offering credit card facility. Credit Card is covered by three networks VISA, Master Card & American Express. Debit cards are issued to account holders of any bank in Pakistan almost all the banks are offering debit card facility the amount used by the debit card holder is directly debited from the account of the card holder. Debit cards are accepted at all ORIX Network in Pakistan and it can also be used as ATM cards which are covered by 1-Link & MNET network in Pakistan. Deposit Accounts All the commercial banks are offering different kinds of deposit accounts these account ranges from customer to customer to fill the need of every type of customer. Few of the accounts provide high interest while some pay low interest & some don‘t pay any interest. Some major categories of deposit accounts are; Current Accounts Saving Accounts Foreign Currency Accounts Business Accounts Term Deposits Accounts Wealth Management Wealth management is a new kind of service introduced in consumer banking sector now days. It covers all aspects of securing future of bank‘s customers it includes insurance, tax advisory, financial consultancy, investments plans, etc. Yet wealth management service are mainly covered by few foreign banks only this is a new service are even bank‘s customers don‘t have any idea about Wealth Management Service. Almost all the banks are offering insurance services to some of their customers but the concept of wealth management is not behind it. E-banking To facilitate its customers all banks local & foreign are offering high technological e-banking services. These services let the banks customers to perform many banking activities easily without any restriction of time & place. Some of the major e-banking services provided by the banks are; Phone banking Internet banking Plastic Cards Online banking
  7. 7. 7 Consumer Banking in Pakistan (Consumer Behavior) Mobile banking ATM Pakistan Banks’ Association (PBA) Pakistan Banks‘ Association (PBA) represents the Pakistan Banking Industry. Established in 1953, its main objective is to coordinate the efforts of the banking industry, and to share a common vision of progress and development with its members. PBA Membership is institutionalized and is available only to the Banks operating in Pakistan. Currently there are 44 members, categorized into 6 groups (one of these groups is under formation). Its governing body is an Executive Committee (EC) comprising of 14 members, represented by the Chief Executives of the respective member institutions. PBA‘s Principal Executive is the Chairman of the Executive Committee, elected periodically from within the EC. Presently, PBA has 10 functional Sub Committees, each chaired by a member of the Executive Committee. Remaining members of the Sub Committees are relevant Executives of member banks. Find more about PBA and it‘s governance in the PBA Profile Section. Particulars of members such as their corporate and management profiles, branch networks and financial statements are available in the PBA Members Section. Over the years the role of PBA has broadened considerably. It is now referred to by the State Bank of Pakistan in formulation of regulations for the banking industry, and has been entrusted with the function of regulating and monitoring certain services provided to the banking industry by outside service providers. These service providers include ‗Professional Valuers‘, who are evaluators allowed to appraise the values of assets collateralized to banks, and Security Agencies offering security services to the Banking Industry. For details visit the PBA Panels Section. Following financial institutions are the members of Pakistan Banks' Association. Government Owned Banks: First Women Bank Limited Khushhali Bank Limited National Bank of Pakistan SME Bank Limited Sindh Bank Limited The Bank of Khyber The Bank of Punjab The Punjab Provincial Cooperative Bank Limited Zarai Taraqiati Bank Limited Privatized Banks: Allied Bank Limited Habib Bank Limited
  8. 8. 8 Consumer Banking in Pakistan (Consumer Behavior) MCB Bank Limited United Bank Limited Development Financial Institutions: National Investment Trust Limited Pak Brunei Investment Company Limited PAIR Investment Company Limited Pakistan Kuwait Investment Company (Pvt.) Limited Pak Libya Holding Company (Pvt.) Limited Pak Oman Investment Company Limited Saudi Pak Industrial & Agricultural Investment Company Limited Small and Medium Enterprise (PBA subgroup under formation): The First MicroFinanceBank Limited Private Banks: Al Baraka Bank (Pakistan) Limited Askari Bank Limited Bank Alfalah Limited Bank AL Habib Limited BankIslami Pakistan Limited Burj Bank Limited Dubai Islamic Bank Pakistan Limited Faysal Bank Limited Habib Metropolitan Bank Limited JS Bank Limited KASB Bank Limited Meezan Bank Limited NIB Bank Limited Samba Bank Limited Silkbank Limited Soneri Bank Limited Standard Chartered Bank (Pakistan) Limited Summit Bank Limited (Formerly Arif Habib Bank Limited) Foreign Banks: Barclays Bank PLC, Pakistan Citibank N.A., Pakistan Deutsche Bank AG, Pakistan HSBC Bank Middle East Limited, Pakistan
  9. 9. 9 Consumer Banking in Pakistan (Consumer Behavior) HSBC Bank Oman S.A.O.G. (Formerly Oman International Bank S.A.O.G.) Non-Member Banks & Development Financial Institutions: APNA Micro Finance Bank Limited (Formerly Network Micro Finance Bank Limited) Bank of Tokyo Mitsubishi UFJ Limited, Pakistan House Building Finance Company Limited Industrial and Commercial Bank of China Limited Industrial Development Bank Limited KASHF Microfinance Bank Limited NRSP Microfinance Bank Limited Pak-China Investment Company Limited Pak Oman Microfinance Bank Limited Tameer Micro Finance Bank Limited U Microfinance Bank Limited (Formerly Rozgar Microfinance bank Limited) Waseela Microfinance Bank Limited Contribution Consumer Banking in Economic Development In Pakistan, consumer finance despite rapid growth during initial period of 2-3 years has started declining. During past few years the domestic consumer finance emerged as one of the key factors to boost economic growth despite its comparatively low share of 14 per cent in the total private sector credit compared to its share in other countries like India and Indonesia where it stands at 24 per cent and 30 per cent respectively. Regional and global markets and economic players have become highly competitive and banking sector is more concerned to safeguard its capital and enrich itself with higher returns on loans than government‘s concern about boosting economic growth. Consumer Financing & Economic Growth: Lending through credit cards, personal loans, auto loans, loans for durables and housing finance emerged main streams of consumer finance. They shaped domestic demand and lending strategy by the banking sector in quite subtle ways. Consumer finance has also brought social change through higher circular of money and relaxation of income constraints for borrowing particularly among those middle class segments that were eager to become part of growing economy and keen to benefit from economic growth. Without consumer finance being in the driving seat of the banking sector, a large number of people would not have benefited.
  10. 10. 10 Consumer Banking in Pakistan (Consumer Behavior) Lending through credit cards, personal loans, auto loans, loans for durables and housing finance emerged main streams of consumer finance. They shaped domestic demand and lending strategy by the banking sector in quite subtle ways. Consumer finance has also brought social change through higher circular of money and relaxation of income constraints for borrowing particularly among those middle class segments that were eager to become part of growing economy and keen to benefit from economic growth. Significance impact on Consumer: In a generic sense, institutional arrangements that provide consumers with financing support to enhance their consumption and, as a result thereof, improve their standards of living, should fall within the broad definition of Consumer Finance. These could range from Credit Cards, to finance and operating leases, to housing finance. But the semantics of financial markets generally tend to exclude housing finance from this range treating it as a distinct financing product essentially because of its long-term nature. For the past fifty-four years, commercial banks in Pakistan had completely ignored consumer financing as an activity. There was scant realization of the fact that the hallmark of healthy economies is not unrealistically high dependence on exports but on domestic demand, and development of indigenous resource and industrial bases that support domestic consumption. Until the early l990s, even Credit Cards were offered to a select band of customers who needed them not by way of financial support but as a convenience for paying their bills while travelling abroad, realizing little that in developed economies this mode of financing supported consumption to sustain steady growth in domestic demand which, in turn, prompted investment and industrialization. Even now, the sudden urge for promoting consumer finance has less to do with accepting this reality; it was spurred largely by a depressed investment climate in which reduced borrowing by industrial and commercial sectors coincided with excess liquidity in banks, thanks to 9/11. Lumbered with liquidity that is nearing unmanageable proportions, banks are now aggressively promoting consumer financing. The big attraction in extending financing facilities to the passive consumer segment is the prospect of earning high interest rate spreads because consumers are soft targets as far as haggling over interest rates chargeable to them are concerned. They are much more likely to borrow at unrealistically high rates — a convenience that is no longer available on lending to industrial and commercial borrowers who now insist on the finest possible loan rates. But in pricing consumer loans unrealistically high, banks would be making a serious mistake because "they cannot charge a high enough loan rate that could compensate for the loss arising out of an irrecoverable loan." More importantly, if consumer finance has to pick-up as a truly helpful mechanism for spurring domestic demand, it must be ensured that it remains within the consumers' capacity to repay their loans on time, and they feel confident about borrowing again and again. As its is, ordinary consumers' capacity to borrow and repay loans out of their savings has been rendered precarious by decades long cycle of inept economic policies that have made the poor even
  11. 11. 11 Consumer Banking in Pakistan (Consumer Behavior) poorer. Low rise in per capita incomes (whose impact was compounded by falling purchasing power due to rapid depreciation of the Rupee) caused savings to fall and poverty to rise. This combination steadily depressed consumer demand even for the less expensive consumer durables. The sustained trend of depressed demand prevented the development of a sizeable industrial base and contraction in opportunities for investment and employment. In the last two years, steady reductions in returns on savings have further diminished consumers' capacity to repay bank loans. Banks are belatedly trying to redress this enormous macroeconomic structural imbalance but given the historic pattem of economic developments, they will be handicapped in their efforts to promote consumer finance. Signs are that while lower interest rates have certainly enhanced borrowers' capacity to borrow and service consumer loans, the newly created demand is pushing prices of consumer durables to unrealistic levels. Take, for example, automobiles. Strengthening of the Rupee and substantially lower interest rates should have brought their prices down or at least served to stabilize them. Neither of these expectations were met because the sudden rise in demand created a distortion that allowed assemblers not only to push up prices but also created a roaring black market in this sector. With banks now offering liberal consumer finance facilities for acquiring home appliances, their prices too are on the rise although there is substantial over-capacity in this sector. Many observers argue that this distortion is a temporary phase, which will soon become history as production capacities increase to fill the large supply gap. May be so, but going by the example set by the automobile industry (in which, so far, only one assembler has announced a "plan" to double its output) this lag may not be as temporary as some observers make it out to be. Banks providing cheap credit to business and industry at the expense of the savers can exercise a powerful influence on the manufacturing sector to push the case for compensating the savers through lower prices. Unfortunately, however, lack of social responsibility in the corporate sector is too pervasive to bring home this realization to the market players. Aside from the macroeconomic distortions that suppress consumer demand, there are other delicate issues that require focused attention of commercial banks intending to launch a major thrust in consumer finance. The first is the lack of institutional arrangements and practices that hamper the assessment of consumers' re-payment risk. Ideally, risk assessment of employed individuals should not pose as much of a problem as the self-employed individuals because employers could help in providing a basis for establishing the employees' re-payment capacity. That, unfortunately, is not yet the case. Employers appear averse to taking even the feeblest responsibility on account of their employees. Many employers either don't certify, or certify very inadequately, the financial status of their employees intending to avail a consumer finance facility from a bank. Unless provisions are made in relevant labour laws, employers will not provide even this information about their employees, which they should morally feel bound to provide. Fewer among them are prepared to confirm to the financing institution that they have placed on their records the fact that their employee has availed a financing facility. Fewer still are prepared to accept the responsibility of informing the financing institution in the event the finance-availing employee leaves the employer, or is asked by the employer to leave.
  12. 12. 12 Consumer Banking in Pakistan (Consumer Behavior) In the case of the self-employed, the problems are complicated further because many potential consumers do not keep credible records of the streams of earnings from their vocations or businesses to permit financing banks a reliable assessment of their future re-payment capacity. Many consumers don't have utility service connections in their names. Given these handicaps, credibly verifying consumers' repayment sources will remain a stumbling block. Unless insurance companies lend a helping hand in this effort by providing loan re-payment guarantees to the lending banks, the prospects of expanding the consumer finance market remain dim. Bankers will have to rely largely on their own credit judgment, which may not always be correct. Given Pakistani bankers' track record in lending, such a possibility will always be there. A factor that will further complicate extending consumer finance facilities along sound lines are the continuing inadequacies of our legal system that make it cumbersome for borrowers to collateralise their existing unencumbered assets for the satisfaction of the lending bankers. Another thorny issue is the re-possession of financed assets. While re-possessing vehicles doesn't pose too serious problem, re-possessing assets such as air-conditioners, refrigerators, televisions sets, and similar other appliances from households will not be easy. It could be both painful and embarrassing for the lending institutions. Even if these items could be re-possessed, re-selling them to recover book values of outstanding consumer liabilities holds out a challenging prospect. Resorting to shortcuts in risk assessment may therefore lumber banks with thousands of small delinquent loans. In most cases, it may eventually be cheaper to write them off rather than go for re-possession and sale of used assets, or initiate court action to recover loans from defaulting consumers. Consumer finance is a risky ball game. The infamous yellow cabs scheme was the only big experiment in consumer finance, which was undoubtedly a bad experience for most banks that took part in it. Admittedly, political twists played a big role in the failure of the scheme but operational inadequacies of banks played a bigger role in this monumental failure. A major factor in that failure was the operational deficiencies in banks, particularly in assessing an individual's future repayment capacity keeping in view his or her changing circumstances. Foreseeing impending changes in the circumstances of individuals is not the same as sensing the impact of changing business cycles on major borrowers placed in various economic sectors. Little is available in terms of authentic statistics on this huge customer category. Pakistan Integrated Household Survey (PIHS) is a new report, and its timely release cannot be assured because it may report changes in politically sensitive indicators. Given the absence of credible sources and bases for assessing risk, dealing with thousands of small borrowers makes consumer finance is a manpower intensive business. Retail banks with large branch networks have the potential for succeeding in this business but it will require making alterations in banks' infrastructure, and a change in the focus on investigative effort for risk assessment. The organization must be pro-active and sufficient in terms of manpower and Management Information Systems to ensure a reaction speed that is commensurate with size of the customer base. In this regard it will be crucially important to ensure that administrative resources are matched with the size of customer base on a continuing basis. Until recently, oblivious to the emerging possibility of creating a large consumer finance market, banks were closing down branches and laying-off employees. Admittedly, there was a need for pruning the banks of deadwood but voluntary retirement schemes led to separation of many experienced hands who
  13. 13. 13 Consumer Banking in Pakistan (Consumer Behavior) could have been re-deployed in consumer finance units because they knew the essentials of risk assessment. Banks will now have to inject fresh (and inexperienced) blood in their organizations to support their consumer finance operations. Admittedly, consumer finance spurs consumption and demand that is necessary for the industry to expand its productive capacity or make fuller use of its existing excess capacity, and succeed in cuffing prices at the retail level. It also offers the prospects of increasing employment and, possibly, fresh investment in industrial sectors, especially those producing consumer durables. However, the key to sustaining the consumption-demand equation without pushing inflation to unsustainable levels is the maintenance of the critical balance between savings, investment and borrowers' debt- servicing ability. There is considerable truth in the observation that lowering of interest rates by Central Banks in the mid-1990s, ostensibly to spur demand and economic activity, resulted in acquisition of excessive amounts of "easy" bank credit by businesses and creation of over-capacity there from. Similarly, households too acquired credit (far in excess of their capacity to save and repay) for investing houses, consumer durables and company shares on visibly inflated prices. The credit boom, and the demand created there from, led to meteoric rises in prices and deluded industry into over-investing in capacity building. Eventually, unsustainable burden of debt-servicing forced businesses to crash, and households ended up with negative equities. Maintaining the critical balance between savings, investment and borrowers' debt-servicing ability is possible if input prices remain stable affording businesses to sustain their profitability, and interest rates too remain stable to ensure that, in the medium term, debt-servicing burden remains affordable for both consumers and manufacturers. Unless the system can ensure the maintenance of this delicate balance, economic instability will remain a strong possibility. Countries that tried to achieve an over-kill in spurring domestic demand sometimes overlooked the importance of maintaining this critical balance. We too are trying to achieve the same objective but regulators must ensure that we don't fall in that dangerous trap. Pakistan's economy, already rendered fragile by industrial sector loan losses, simply cannot live through another major upheaval caused by pervasive delinquency of consumer loans. Articles # 1 Citibank has announced that it is wrapping up its consumer banking operations in Pakistan and has entered into an agreement with Habib Bank (HBL) to sell its credit card and consumer lending portfolio, according to a press release. Citi Pakistan will work with HBL to ensure a smooth handover during the transition period. The announcement was made at a signing ceremony held in Karachi, attended by HBL and Citi Pakistan representatives. Speaking at the occasion, HBL President and CEO Nauman Dar said, ―HBL will continue to be a key developer of consumer finance products in Pakistan. The acquisition is part of this commitment and ties in with the bank‘s mission of creating value for stakeholders, especially our customers.‖
  14. 14. 14 Consumer Banking in Pakistan (Consumer Behavior) Nadeem Lodhi, Citi‘s country officer in Pakistan, said, ―Citibank was a pioneer in growing consumer lending products in the Pakistani market and has since contributed to strengthening the consumer banking landscape in the country. We have had the privilege to serve our clients, whose discerning requirements and standards were met through our global banking platform. We look forward to working with HBL, to ensure a smooth transition for our customers.‖ ―Citi Pakistan will continue to focus on its core business of corporate and investment banking serving our multinational, public sector, financial institutions and top-tier local corporate client base,‖ Lodhi added. Article # 2 Weak economic conditions hitting retail banking hard’ KARACHI: Pakistan‘s retail banking market is undergoing difficult times due to weak economic conditions, bank‘s rising non-performing loans and the lack of effective foreclosure laws; however, local financial players try to retain this market by acquiring retail or consumer lending portfolios of the foreign banks, experts said. The deal for the acquisition of Citibank‘s (Pakistan operations) consumer business portfolio with the Habib Bank Limited depicts this trend. The deal is expected to be finalised by the end of this fiscal year. The financial experts said the acquisition of retail lending portfolios reflects the very real appetite for profitable, high quality consumer assets in an environment where deposit growth is outpacing lending growth, particularly in terms of consumer lending. Despite this appetite, however, the banking sector has been unable to grow their consumer lending portfolios through fresh exposures to new or existing clients. ―Banks participating in the retail lending market took significant hits to their profitability during the last credit crisis and the memory of those losses is reflected in the generally conservative underwriting policies being followed by most banks,‖ Naseer Hasan, head of consumer banking at Standard Chartered Bank, said. He also said that the regulatory framework for consumer lending, tightened during the last credit crisis, further ensures that the growth in the consumer lending sector remains measured. ―The use of positive credit bureaus during the last six to seven years has excluded several consumers from the lending market due to their past credit history and the reluctance of banks to bet on these consumers again,‖ he said. The legal environment in the country in recent times has not helped the banks in terms of collections or legal actions against defaulters, he added. He was of the view that the lower interest rates have yet to translate into lower customer rates for consumer lending products. The banks have yet to come up with the cost models for their retail lending operations that would allow for lower rates and more sustainable profitability. ―Big banks sell their specific segments and the practice to divest business from one geographical area and investing in another is very common among the American and European banks due to a number of reasons such as weak economic conditions, new regulations and capital adequacy ratio,‖ another banker at a leading commercial bank, said. He said that after the financial crisis, several western banks preferred to concentrate on their home
  15. 15. 15 Consumer Banking in Pakistan (Consumer Behavior) or similar markets. Barclays, HSBC and RBS are in the process of shrinking the operations from different regions such as the Middle East. Citibank is divesting its consumer banking operations from Pakistan but it will remain operative in the investment and corporate banking as per its global strategy, he said. ―There are many geographical areas where Citibank is providing corporate and investment banking to the big deal tickets only. This is the history of Citibank.‖ ―HBL credit card segment was weak and Citibank has good customer built. So, after the acquisition, HBL will be in a better position to grab the credit market,‖ Muzzammil Aslam, a senior economist, said. To a question why Citibank decided to exit from Pakistan‘s consumer market, he said, in the presence of local five big banks, foreign banks have very small opportunity to grow. In Pakistan, third-tier banks are facing difficulties in meeting the capital adequacy requirements, therefore, these banks are going for merger and acquisitions. ―In this particular transaction, there was no level-playing field provided by the regulator to the interested parties. The MCB Bank was keen to acquire the consumer business of the Citibank but the central bank granted the approval to start the process of due diligence very late. Somehow, the regulator denied new entrants to come into the process of due diligence. It could be better if more big players were there,‖ he added. Bank Alfalah was inclined to buy the Citibank‘s consumer portfolio, however, later it withdrew from the race. REFERENCES: History : Published in The Express Tribune, November 2nd, 2011. Shahid, A.B. (2003), ―Consumer Finance: What are its chance of Success”, Pak & Gulf Economist, viewed 27 February 2008, State Bank of Pakistan (2006), ―Prudential Regulations for Consumer Financing”, Banking Policy and Regulation Department, viewed 15 February 2008, http://www.sbp.org.pk/publications/prudential/index.htm. http://www.hks.harvard.edu/m-rcbg/CSRI/publications/report_19_EO%20Finance%20Final.pdf http://www.scribd.com/doc/118376875/Consumer-Banking-in-Pakistan#page=70 Thank you!!

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