Banking Review 2014 highlights challenges facing Pakistan's banking sector

Monday, April 20, 2015 | www.brecorder.com/br2014
Banking
Review2014

BANKING REVIEW 2014 | April 20, 2015
ContentsFROM THEEDITOR’SDESK
PAGE 4
BANKINGSTILLFOUNDWANTING
Ali Khizar Aslam
PAGE 5
BANK-LEDMODELISTHERIGHT
MODELFORBRANCHLESSBANKING
Nauman Dar
President, Habib Bank Limited
PAGE 6
Syed Majeedullah Husaini
President and CEO, Askari Bank Limited
NOLEAPSINPRIVATELENDING
PAGE 7
“RISK”DEFININGASSETMIX
Zuhair Abbasi
PAGE 22
SCBTOHARNESS
LIFECYCLEBANKING
Shazad Dada
CEO Standard Chartered Bank
PAGE 24
GOVERNMENTBOND
TRADINGONLOCALBOURSE
Rabia Lalani
PAGE 25
FLATMCRPREVENTING
NICHEBANKINGGROWTH
Hussain Lawai
President, Summit Bank
PAGE 26
SBP’SROLE
INTRANSFORMING
MICROFINANCE
Dr. Saeed Ahmed
PAGE 28
SBPSHOULDCAPBANKS’
PIBINVESTMENTS
Shaukat Tarin
Chairman Silk Bank
PAGE 30
2014MARKEDNUMEROUS
ACHIEVEMENTSFORUS
Junaid Ahmed
CEO Dubai Islamic Bank
Pakistan Limited (DIBPL)
PAGE 31
DEMANDFORISLAMIC
PRODUCTSISMUCHGREATER
THANSUPPLY
Irfan Siddiqui
Founding President & CEO
Meezan Bank
PAGE 32
BRANCHLESSBANKINGSECTION
PAGE 38
DRAFTMORTGAGERECOVERY
LAWSTOBEFINALIZEDSOON
Ashraf Wathra
Governor, State Bank Of Pakistan
PAGE 18
PAGE 10
GOVERNMENTSHOULD
BORROWDIRECTLYFROMPUBLIC
Munir Kamal
Chairman NBP
PAGE 11
GREENFINANCING
Sidra Farrukh
PAGE 8
FINANCIALINCLUSION:
A DREAM NOT SO DISTANT
Hasan Faraz
PAGE 14
AGRICULTUREFINANCEIN
PAKISTAN-MOVING TOWARDS
GROWTH AND SUSTAINABILITY
Dr. Saeed Ahmed
PAGE 12
HOUSEFINANCEANDCORPORATE
LENDINGTOTHRIVEIN2015
Mian Muhammad Mansha
Chairman MCB
PAGE 16
DEBTCAPITALAPRESSINGNEED
Atif Bajwa
CEO Bank Alfalah Limited
Ali Khizar Aslam
PAGE 33
LESSONSFROMKASBEPISODE
Tahira Raza
President & CEO
First Women Bank Ltd
PAGE 34
SMEsAREOURMAINFOCUS
Sohaib Jamali
PAGE 36
LAZYBANKERS?REALLY?
PAGE 17
ALOOKBACKTOBANKSINCY14
Rabia Lalani
BANKINGINNUMBERS
PAGE 20
BR
RESEARCH
THE TEAM
Sohaib Jamali
Research Editor
Ali Khizar Aslam
Head of Research
Murtaza Khaliq
Creative Consultant
Research Analyst
Syed Hasan Mehdi
Research Analyst
Jehangir Ashraf
Rabia Lalani
Research Analyst
Zuhair Abbasi
Senior Research Analyst
Rabia Lalani
Research Analyst
Zuhair Abbasi
Senior Research Analyst
Sijal Fawad
Research Analyst
Mobin Nasir
Editorial Consultant
Sidra Farrukh
Research Analyst
Naseem Waheed

/ Banking Review2014 / April20,2015
Banking system and
economic growth
From Editor’s desk
The primary task of a bank is to act as an intermedi-
ary between savers and borrowers and it is always
required to allocate resources at the lowest possible
cost in an efficient and judicious manner. A sound
and efficient banking system is one of the most
important preconditions to achieve economic
development. And the objective of this brief note is
to call upon our relevant institutions and individuals
to examine whether our banking sector is playing a
growth-supporting role in the country’s economy
because it is generally argued that the more
developed a banking system in a nation, the more
efficient and healthy will be that nation’s economic
growth. However, before we seek to examine
whether or not banks in Pakistan perform their role
accordingly, a glance at the landscape of the
banking system in the country would be in order.
That it has significantly changed in recent years is a
fact that has found its best expression in implemen-
tation, albeit partially, of financial sector reforms and
achievement of a more competitive market
structure with expanding market share of private
sector banks. The arguments that significant gains
have also been achieved in the form of better
supervision and regulation of financial markets and
institutions, the local banking industry is now
considerably resilient in absorbing adverse
shocks--both internal and external-- need to be
examined carefully. These achievements, however,
appear shallow because of a variety of reasons.
Internal and external challenges that the banking
industry in Pakistan faces are numerous. Internal
challenges include lack of technical expertise,
infrastructure development, development of liability
products, anti-money laundering, human resource
development, equity stock investment, E-banking
and Islamic banking.
Another point that needs attention is the robust
performance of big banks in the absence of strong
economic growth in the country. The positive
relationship between financial development and
economic growth seems to have weakened in
Pakistan in recent years. It has been plausibly
argued that banks or financial intermediaries need
to allocate resources efficiently when providing their
services and products. Insofar as Pakistan is
concerned, banks’ intermediation is crowding out
the use of productive factors—the real econo-
my—that could potentially foster economic growth
and development. A seemingly abnormal focus on
government papers by banks is a strong case in
point. In other words, the government of Pakistan is
perhaps their only or major client. The State Bank of
Pakistan, the apex regulator, seems to have ignored
for whatever reasons the need for carrying out the
required research to examine whether banks’
relative ability to convert resources into financial
products and services affect the extent of economic
growth. It needs to offer a convincing argument
based on evidence, however empirical, that merely
increasing the size of the banking system does not
necessarily affect economic growth in a country like
Pakistan. It is also required to make it public that the
direct effect of increasing private credit is almost
negative, indicating that more credit is not necessar-
ily allocated in such a way as to spur growth. In the
meantime, the apex regulator must not lose sight of
the fact that economic growth is one of the ultimate
goals of an economic system. It needs to ascertain
whether or not the private sector credit and interest
margin are negatively related to economic growth.
There is a generalized conclusion that a fragile law
and order situation and chronic power outages
continue to constitute major impediments towards
efforts aimed at fostering economic growth and
encouraging increased private sector off-take. But
these two principal obstacles have been there for
the past many years. Consider: Why is it that despite
the fact that the country has received GSP-Plus favor
from the EU, credit off-take by textile industry, the
largest exporter segment and employer of the
country, remained largely flat in the last one year?
According to the State Bank of Pakistan, outstanding
position of loans extended to textile business as of
January 31 was Rs 606 billion, which is 0.4 percent
less than the corresponding figure recorded at the
end of January 2014.
The apex regulator is therefore required to
inject clarity in the complexity of the present
situation. An answer to this question, therefore, has
been warranted by the absence of a strong private
sector appetite, robust economic growth and new
job opportunities in an environment of relatively low
interest rates in Pakistan.

Bankingstillfoundwanting
Ali Khizar
The irony is undeniable; an improved macroeconomic
landscape has brought some tough days for the country’s
banking sector. The inherently cash economy coupled with
the government heavy reliance on the banking system has
created an anomalous feature among commercial banks in
recent times.
Last year, the sector thrived on the inefficiencies of the
economy; presenting a case study in rent seeking behavior.
Since FY08, the economy has witnessed low growth and high
inflation. The banking sector was initially hit by high non-per-
forming loans which sliced its profitability to almost half
(Rs43bn) in 2008 from its earlier peak (Rs84bn) of 2006. This
struggle continued till 2010 followed by significant growth in
the sector’s cumulative bottom line (72%) in 2011 and then
remained modest in 2012 and 2013 before it jumped again
(46%) in 2014.
Prior to 2007, deregulation and privatization of banks bore
fruit while the economy grew and private lending thrived.
Advances to deposits ratio peaked at 75 percent in 2006. At
that time, interest rates were low and economic opportunities
were aplenty whilst delinquencies were not a major hindrance
for the banks. And with a relatively low fiscal deficit, there
wasn’t much crowding out of the private sector.
The banks were all poised to perform their primary
function: financial intermediation. Deposits to GDP averaged
at 40 percent for CY05-08 while advances to GDP ratio was
30 percent. These proportions were low compared to
regional and global peers but the direction was right. Then
came the global financial crisis, and more importantly, the
twin deficits crisis at home. Inflation reached high double
digits while economic growth was restricted to 2-3 percent. In
the midst of these crumbling macroeconomic indicators,
banks’ toxic debts started to swell and profits dropped.
In 2010, banks’ gross non-performing ratio reached 15
percent from 7 percent in 2006. The sector revised its
strategy to stay away from the private sector and began
looking solely towards government paper to improve asset
quality. The objective was achieved; capital adequacy of the
sector is much better now as only three banks have CAR
below three percent today, compared to seven banks in 2007.
No fewer than 22 banks have CAR over 15 percent. SBP needs
to revise its criteria for minimum capital requirement of Rs10
billion for small banks, assigning more weight to improved
CAR. The causality of skewed approach is KASB – yes, the
bank had issues but could have been handled in a better way.
However, since the risk-free government assets were
lowering banks’ ability to earn through markup, the banks
countered by focusing on growing CASA to bring down core
cost, even as interest rates rose. That is why with peaked
rates, profitability grew in 2011. The banks persist in their
obsession with CASA to date. Concurrently, the sector’s ADR
has come down to 48 percent (2014-end) from a peak of 75
percent in 2008. On the flip side, IDR went up from 26 percent
to 58 percent in the same period.
Advances to GDP ratio kept on its southward journey,
dropping to 17 percent in 2014. To add the ado, banks’ reliance
on cheap deposits (CASA increased from 59% in 2008 to 68%
in 2014 ) has swayed marginal savers away from the sector.
Deposits to GDP are down to 36 percent (2014) from the peak
of 44 percent (2005).
Is the central bank doing anything to undo the demise of
savings in banking system? On the contrary, it seems the
government is facilitating banks by issuing tons of PIBs to
replace T-Bills. Consequently, the sector’s profitability got a
boost in 2014 without doing any real banking. The finance
ministry has literally transferred money to the banks’
treasuries at the cost of tax payers. The government has
issued PIBs of worth Rs2.5 trillion in 2014 alone which is
almost double of cumulative issues over the last 13 years.
Assuming 2.5 percent average interest rate differential of PIBs
and T-Bills, the incremental annual cost to tax payers is Rs63
billion; out of which Rs22 billion is back with the government
through taxes while the rest of the Rs41 billion were pocketed
by banks’ shareholders. That explains the 46 percent or Rs51
billion growth in the sector’s profitability during the recently
concluded year.
Why is the government doing this? Apparently, it’s an effort
to re-profile the maturity of government’s domestic debt. But
should the re-profiling be so abrupt? Who is responsible for
the incremental cost of debt servicing? And why can the
government not borrow directly from the public? One way to
do so would have been to securitize government debt to
home remittances and sell the same to expatriates. But is
there any will to follow through on this?
Another externality of this debt re-profiling is widening the
asset-liability mismatch among banks. The central bank’s
response is, again, in question. Didn’t the government bodies
think of the cost of banks’ asset-liability mismatch while
mending government’s debt profile?
Whatever has transpired cannot be undone, but 2015 holds a
different reality for the banks; one without super normal
profits. Macro indicators have improved; inflation is down,
current account deficit is expected to be tamed and other
foreign flows will keep the balance of payments contained, for
now. There are also some marginal improvements in the fiscal
house with a low deficit expected. So the government may
desist from issuing large quantum of PIBs and T-Bills.
With interest rates trending lower and fewer government
paper in the offing, what can banks do to maintain high
profits? After all, sustaining high spreads will not be possible.
The banks ought to revert to commercial banking i.e. lending
to the private sector. But that’s not easy; the banks still have
the sour taste of high toxic assets from aggressive lending to
consumers and SMEs in 2003-2006.
Hopefully they have learnt from their mistakes and have
come with better models to extend credit to private hands.
But even with a measured strategy, rolling out private sector
advances will take time and banks’ profitability growth may
be the casualty in 2015.
Some banks are geared for vibrant consumer banking with a
good product mix of credit cards and personal loans. A
relatively virgin area for banks is the mortgage market and if
it picks up, there is immense potential to kick start economic
growth. Developed countries have biggest portfolio in the
segment (EU: 23% of GDP, US:58% of GDP) while the emerging
economies have also thrived on it. In Thailand the share of
mortgage lending in GDP is 12 percent while it is mere 0.4
percent in Pakistan.
The biggest impediment is the poor repossession law which
does not effectively mitigate the risk of willful defaults. That is
why banks are cautious in their approach and may target
fewer customers in selected housing schemes where
property laws are well defined. The other issue is in pricing;
the absence of a long term yield curve and lack of long term
liabilities to finance loans of longer maturity (20-30 year). The
government has lately done some work in developing a
mortgage finance company to plug in the holes though the
idea first emerged in 2009.
The other challenge is to expand SME lending – poor
documentation and lack of financial reporting are short
comings in that space. Meanwhile lenders are living with the
memory of losses incurred in the last economic boom. The
central credit scoring model did not work so loans have to
emanate from branches which must evolve from mere
deposit creating shops to profit making outlets.
Banks with strong balance sheets can do so. Some banks
have models in mind to offer a host of solutions to clients,
including full financial management which may eventually
lead to capital financing. The regulatory hitch is again, poor
recovery laws. SBP must sit with the Planning Commission
and other government bodies to create better laws, expedite
court proceedings and resurrect banking courts. Until then
meaningful SME lending will remain a distant dream.
In the corporate segment, the banks will focus on energy
sector where a number of projects are coming up. There is
some expansion in textile sector which may open avenues for
capital lending. There is also an opportunity to increase stakes
in the telecom sector as operators are expanding their base to
cater 3G/4G segment. Apart from those, building up of roads
and other infrastructure must be enticing for banks.
The central bank must push forward on financial inclusion.
Only 10 percent of the population has unique bank accounts
and the thin deposits base (1/3 of GDP) is crying for expansion.
Given religious beliefs and preferences, Islamic banking must
emerge to fill this void.
In a decade of existence, Islamic banking is one tenth of the
sector and still has a lot of room to grow. Virtually, every bank
has aggressive plans to expand its Islamic portfolio and one
bank (Summit) is set to convert into an Islamic bank. Others
plan on beefing up their Islamic banking operations through
subsidiaries and windows. It would not be surprising if Islamic
banking share doubles in the next five years. One hopes
banking coverage will increase as a consequence.
SBP had earlier instructed banks to open a branch in a
remote area for every five new branches. Sooner or later, the
deprived rural community will have some access to banks.
But alternate delivery channels are also driving financial
inclusion and although challenges remain, the successes of
UBL Omini and Easy Paisa are for others to follow.
Page 05 / Banking Review2014 / April20,2015
Macro indicators have
improved; inflation is down,
current account deficit is
expected to be tamed and
other foreign flows will keep
the balance of payments
contained, for now.
The writer is Head of research at
Business Recorder. He can be reached at
ali.khizar@br-mail.com

Bank-ledmodelistheright
modelforbranchlessbanking
BR Research: What concerns the most to
the country’s largest financial institution?
Nauman Dar: Financial inclusion! Let’s
establish the context for it. As the country’s
largest financial institution, we have 15
percent market share but we have only eight
million customers. As you know, the country
has a population of more than 180 million.
Clearly, there is something wrong in terms of
financial inclusion. We believe that financial
inclusion is extremely important for the
development of the country. Gender diversity
is extremely important for the development
of the country. Making financial transactions
easy to execute for individuals is extremely
important for the country.
BRR: So, how do you increase the inclusion
as a responsible, large bank?
ND: You must have your footprint, access,
increased outreach and you must have
people in place who understand why they are
doing what they are doing instead of being
focused solely on making money.
If you analyse it such, it becomes obvious
that achieving these objectives in this day
and age, you must harness technology. The
people who work for you and the technology
you deploy are vital components of strategy.
With these thoughts, you must have an
approach of having desire and ability to
invest in people and technology and have the
belief that the results will follow. We have a
board that believes in that. Our majority
stakeholder firmly believes in that so we are
not chased every quarter about how much
money we made. We are asked how many
more people have you touched and what
have you enabled them to do?
Unlike many other banks, we have never
closed a branch purely on profitability
grounds. We believe that financial inclusion is
very much a fabric of our thought process.
We believe that is the business. Chasing
numbers and profitability drives banks to
make bad decisions and costly mistakes.
BRR:Youmentionedtechnology;howmuch
haveyoubeeninvestingintechnology?
ND: Heavily! We have gone into branchless
banking and are investing in that. We have
gone into making mobile phones more
effective way of dealing with the bank. We are
investing in phone banking. In 2011 our tech
spend was a billion rupees. This year it was
Rs2.7 billion. That’s over 30 percent growth
per year in that period. If you look at the year
of privatization, the tech spend was Rs282
million. The very next year it went up to
almost Rs800 million and almost a billion in
the following year.
That initial surge was due to the implemen-
tation of our core banking ERP. Following that
there was a consolidation period until 2011-end.
We have now gone into efficiency upgrades
and new systems for delivery channels.
BRR: You add enough branches each year
to constitute a mid-sized bank. Yet there
are many underserved urban areas and
unserved rural areas. What is HBL doing to
address that void?
ND: We feel that for someone like us can
make a significant difference by placing
ourselves in the digital space. Our savings
deposit category makes up about 44
percent of our total deposits. That’s a big
chunk. That’s our strength. This proportion
has remained a very big proportion despite
the fact that total deposits have doubled
since 2010.
People feel comfortable in keeping their
money with us. When it is a telco or a new
bank that lets you load money and get it to
the other end very fast, people will use the
service for money transfers but not be
comfortable with leaving that money in a
mobile wallet. We feel that if HBL has its
footprint in digital space in a meaningful way,
we will inspire the confidence that will let
people store their funds thus. This bank-led
model is the right model because it can
increase savings but it will only happen when
the banks are in that space.
Unfortunately, the banks were denied that
access by the telcos. The secure USSG
channels were not given to the banks by
telcos. So the banks had to work around it and
build on SMS, etc that made the process
cumbersome. With changes in technology and
prevalence of smart phones, the banks will
have their mobile apps and telco performing
the interplay will become less relevant. So it is
only a matter of time until banks like HBL will
find their proper space in that segment. Then
you will see an increase in the number of
people putting their money in banks.
BRR: Deposits may grow in this way but
banks are not lending to private sector
either. As rates go down, won’t the banks
find it hard to expand advances?
ND: Where we are focusing and see the
future is: firstly, agriculture. We are an
agricultural economy yet if you look at
farmers, there is hardly any access available
for financing. Banks do not have programs
which take them to the rural areas. We as
HBL have been most active in rural, agricul-
tural financing among the private banks. The
growth that we have exhibited in this space
is 17-18 percent per annum for the past
couple of years. It’s still small, having gone
from Rs14-15 billion to Rs24 billion. In a
country of 180 million people, which is 70
percent agri-based, why shouldn’t this tally
be Rs40 or Rs80 billion? All you need to do
is have good underwriting standards and a
strong field presence that understands the
local dynamics which dictate the perfor-
mance of loans.
Five years ago this was a lot harder. But
when you understand the environment,
deploy people and technology, performance
improves significantly. Similarly in the case of
consumer lending, the growth is over 20
percent. If we can build on this, we can break
into those segments. We are focusing on
SMEs. Where the credit off-take has been slow
is in the medium and large industries due to
energy shortages but also because
businesses have retained earnings and
limited their borrowing requirements. Banks
have also learnt from their experiences with
non-performing assets.
BRR: In early 2000s, banks were lending
heavily. We are now entering similar
market conditions now. How do you see
the banking sector responding to the
situation this time around?
ND: There is no reason for the banks
repeating the horrendous experiences of the
past if they are prudent and professional.
Consumer financing in Pakistan is among the
lowest in the world. So there is also a lot of
room for growth.
Coming back to HBL, we have stressed with
our teams that they have to be extremely
careful and sensitive to mis-selling. You can
very easily falter if your mind-set is focused
on driving numbers. We have been extremely
successful in providing investment products
like bancassurance to all strata in the
economy. To do so, you have to ensure that
the person buying the product understands
the product. We have to ensure that the
person has a genuine need for that product
and it makes a tangible difference to their
living standard.
BRR: Smaller banks have issues with
blanket MCR requirements for all banks. Do
these measures drive all banks away from
niche banking and towards safe havens?
ND: My view is that banking affects the
stability of the overall economy and banks
must be very well capitalized because
economies like ours are fragile to start with
and cannot afford financial crises. Banks must
be very well regulated, well capitalized and
have lots of liquidity. In my opinion, there are
too many banks in Pakistan. There should be
some consolidation so if some of the small
and medium banks were to merge, they
would emerge as much stronger institutions.
Interview by
AliKhizar&MobinNasir
Mr. Nauman K. Dar was appointed President and Chief Executive Officer of Habib Bank
Limited in September 2012.
Mr. Dar joined the Bank in March 2003 as Chief Executive Officer of Habib Allied International
Bank plc, UK. Prior to being appointed as President he was Head of International Banking since
January 2006 and Head of Corporate and Investment Banking since December 2010.
NaumanDar
President, Habib Bank Limited
Banking affects the stability of the over-
all economy and banks must be very
well capitalized because economies like
ours are fragile to start with and cannot
afford financial crises

Noleapsinprivatelending
“Commercial banks are not engaged in lazy
banking, they are merely being prudent and
conservative with the depositors’ money,”
said Syed Husaini, President of Askari Bank in
a recent sit down with BR Research. Asked
whether the falling rate of return on govern-
ment securities may finally force banks to
rely on private sector lending, he retorted
that, “there will be no leaps in private lending,
even as spreads thin and the rate of return on
government securities shrinks.”
Elaborating on his assertion, Husaini said
that the hurdles for domestic businesses are
exogenous factors including energy
shortage, fragile state of law and order,
political noise and militancy. He maintained
that until these challenges are overcome,
lending to businesses would remain fraught
with risk, even where the business owners
are well intentioned and strategically aligned.
“Bad loans in Pakistan stand over Rs700
billion to date. Banks are entrusted with
money by their depositors and investors and
they have to be conservative and risk averse
to ensure wealth preservation before they
can get aggressive in chasing higher returns,”
he said adding that “given the level of bad
loans, lacunas in foreclosure laws and overall
economic conditions, banks are not at liberty
to lend freely in private sector.”
In his opinion, competition for funds is the
best bet for driving banks towards private
sector lending; “the real issue to consider is
the low cost of funds. As long as the cost of
funds remains low, banks will remain
incentivized to park major proportions of
their balance sheet in government securities.”
One area where Askari Bank is lending
heavily is infrastructure. “We believe this is
currently the most important sector of the
economy,” said the bank president highlight-
ing AKBL’s involvement in Lahore-Karachi
Motorway, Rawalpindi Metro Bus, Nandipur
Power and other projects. “We have also
financed aircraft and spare parts for the
national airline,” he added, expressing
readiness to engage in any further opportuni-
ties to lend in infrastructure development
projects. “If all the banks get together to
focus on infrastructure development
projects, we can really help drive broad-
based economic growth,” he contended.
The former central banker has been at the
helm of affairs at Askari Bank since the Fauji
consortium acquired it in June 2013. At the
time of acquisition, the bank’s books appeared
unenviable. The proportion of non-performing
loans was high, and the profit and loss
statement was written in red. The new
management aggressively provisioned for bad
loans, opting to book a loss of about Rs3 billion
in CY13. “The strength of Fauji consortium
allowed us to book this loss, bring in fresh
equity raising Rs5 billion through a rights
issue. These measures helped us strengthen
the balance sheet and set a solid base for
sound performance in CY14,” said Husaini.
“Before trying to go anything good or great,
you must first stop the wrong practices,” he
said adding that the bank’s senior manage-
ment “focused on strengthening controls,
improving transparency and standardizing
operations.” The bank president remains
humble about accomplishments citing
favourable equity markets and stability on
fixed returns and exchange rates as key
contributors to the bank’s ability to improve
its profitability by an order of magnitude.
The outgoing year has been a good one for
Askari Bank and its stakeholders, thanks to
strong bottomline gains in the calendar year.
The new management has also regularized a
majority of the contractual staff, giving the
employees a reason to smile too.
Now that the house is in order, AKBL is
primed for expansion in 2015. “We are aiming
for organic growth of 100 branches in
addition to the 320 existing branches as at
end-CY14,” informed Syed Husaini. Askari
Bank has bid to acquire KASB Bank as well;
and could therefore gain another century of
branches if that deal goes its way.
Among other opportunities that AKBL is
targeting in CY15, the bank looking to expand
overseas through representative offices and
branches and continue to focus on mobile
commerce and branchless banking.
According to Husaini, “international
conditions are favourable for Pakistan to get
its fiscal house in order.” Commodity prices
are low, yet demand for Pakistani exports is
firm, external accounts are intact and
investment flows are steady.” He opined that
further investments should be sought from
China, GCC and other regional countries to
drive large-scale projects. He expressed hope
that the government will use this “window of
opportunity” to initiate pro-growth policies
and economic stability.
A CASE STUDY ON CSR
Proud parents looked on as their children
were inducted as bank officers in Askari Bank
at a simple yet graceful ceremony. The new
recruits were all children of the bank’s
low-cadre employees and had been hired
following the completion of their graduate
level education and an entrance test.
“When the new management stepped in,
we immediately tried to regularize as many
contractual employees as possible. But the
low cadre team members could not be
included in this exercise given lack of
educational credentials,” explained the bank’s
president. “But in life it is often our children
who accomplish those dreams that the
parents are unable to turn into reality.”
With that thought in mind, the bank
initiated a program whereby children of
low-cadre bank employees can appear for a
standardized test following graduation from
university. Upon clearing the test they are
provided paid training and guaranteed
employment. In addition to this, the success-
ful candidates receive complementary office
attire: two shalwar suits for female employ-
ees, two pairs of pants and shirts along with a
pair of ties for the male employees.
“This and other initiatives have brought a
marked improvement to team morale and
work ethic,” said the president. “We are certain
that improving the level of satisfaction and
happiness among the people who comprise
this bank is what will lead Askari Bank towards
sustained success,” he concluded.
Interview by
MobinNasir&ZuhairAbbasi
Syed M. Husaini joined the Bank as President & Chief Executive on June 03, 2013.
Mr. Husaini is Masters in Economics from Karachi University and has obtained professional
certifications by the National Association of Securities Dealers, USA and North American Securi-
ties Administrators Association.
He brings experience of over 30 years in Banking, of which the first ten years were spent
overseas with a number of International Banks in Kenya, Sierra Leone, South Africa and the
Middle East. His assignments led him to successfully manage diversified areas of banking
business including foreign trade finance, Commercial and Corporate finance and Liability
management. He played a significant role in developing training programs and has remained
faculty member with a number of Financial Institutions.
Syed
Majeedullah
Husaini
President and CEO
Askari Bank Limited
“Banks are entrusted with money by their depositors
and investors and they have to be conservative and
risk averse to ensure wealth preservation before
they can get aggressive in chasing higher returns”

A growing number of banks are
trying to replicate the success of
the mobile money networks like
Easy Paisa and Mobicash
According to a report by the Alliance for Financial Inclusion (AFI), nearly 85 percent of adults in
developing countries like Pakistan do not have access to financial services (afi-global.org). What this
means for a developing nation like Pakistan is simple; if we know what are the effects of financial
exclusion in context. Financial exclusion results in widespread inequality in incomes and earning
opportunities, Lack of opportunities to improve businesses both export and local, unregulated
private money lenders who exploit borrowers, no access to consumer finance and inappropriate cash
flows among several others.
Pakistan being an economy of 180 million needs a compulsory set of services in the bank to draw in
the poor. Banking products should address their needs: a safe place to save, a reliable way to send
and receive money, a quick way to borrow in times of need or to escape the clutches of the money
lender, easy to understand life and health insurance and an avenue to engage in savings for the old
age. However, there are a number of challenges that must be overcome. In order to establish their
branchless networks, banks have to tie up with kirana shops, corporate firms and others. Although
several banks in the country are in the branchless business now, but the results are yet to blossom.
Since mobile banking through phones is to play an increasingly important role in a scenario where
physical bank branches will be few; greater coordination between cellular service providers and
banks will also be necessary. Unfortunately, the banks and and cellular service operators are
currently engaged in a power struggle over the unbanked. A growing number of banks are trying to
replicate the success of the mobile money networks like Easy Paisa and Mobicash. Support from the
government and central bank has been forthcoming and will remain crucial going forward.
Then the culture of tax avoidance is rampant and needs to be undone. On the other hand,
insistence on KYC (know your customer) norms has hindered the opening of new accounts even in
urban areas. Great significance is, therefore, attached to simplifying the KYC process. Creating
provisions for opening bank accounts without proof of income and minimized KYC criteria may be
helpful in this regard. This is a fine line for regulators as they attempt to simplify access to banking
while at the same time, keep tabs on unscrupulous economic activity.
Obviously, commercial viability is the key to success. Past experience suggests that without proper
products, the facilities on offer will not be used by the target market while the banks will be saddled
with a large number of dormant accounts. Microfinance penetration has grown at an impressive pace
but its services must evolve and enhance further to boost financial inclusion.
The perception of conventional banking system is misconstrued, particularly in rural areas and
here too, all stakeholders will have to play an active role. Rising financial literacy can play a comple-
mentary role to financial inclusion; and efforts are needed to highlight the importance of savings to
the general public.
It is equally important for the banks and financial institutions to become more relevant for
prospective clients. Their services have to be designed to meet the most pressing needs of the
people, using their preferred technology for interaction. There are opportunities for smart interven-
tions, for instance targeting women’s savings and providing services such as ease of access, privacy
and security.
The Islamic banks, working as trading or investment houses can offer lower risk to clients and also
enjoy strong repute among general public. For this reason, the Islamic banks are well poised to lead
financial inclusion in the country.
Financial
Inclusion:
Adream
notso
distant
Hasan Faraz is Vice President - Retail Product Development at Meezan Bank Limited.
Hasan Faraz holds a MBA degree from IBA Karachi, and carries experience of over 8
years in Financial product development and technology banking.
HasanFaraz

INTERVIEW BY:
MOBIN NASIR AND SOBIA SALEEM
Government should
borrow directly from public
14
36
Munir Kamal | Chairman NBP
The government’s over reliance on the banking sector
for meeting its borrowing needs is an oft repeated tale.
Improving foreign inflows and renewed strength in
external balances may satiate that appetite to a certain
degree in coming months. But the government has not
made any tangible efforts to diversify its domestic
borrowing from the well beaten road of PIB auctions.
Many of the banks have made a lucrative, although
unimaginative business of taking deposits from the
public and piling up risk-free government paper.
Unlike many of the other big banks, National Bank of
Pakistan has more loans on its balance sheet than PIBs
and treasury bills. The bank has dealt with the menace
of non-performing loans, having had to make signifi-
cantly higher provisions in 2013 than the industry; but in
2014 NBP’s books look sharp as a tack.
“We have picked up PIBs this year but NBP has always
been in the market and that’s why we are comfortable
going into a period of lower rates and thinner spreads,”
Chairman NBP Munir Kamal told BR Research. As the
conversation began, Kamal made his disdain for ‘lazy
banking’ apparent at the outset: “banks cannot simply
give up on their basic purpose of financial intermedia-
tion just because there is an emergent supply of
government paper.”
Echoing the concerns raised by many other industry
veterans and policymakers, he highlighted the dismal
trend of bank lending to small and medium enterprises.
“Less than seven percent lending is going to SMEs;
that’s a shame”. According to Kamal, banks must learn
lessons from previous “less than successful” bouts with
private sector lending but remain hungry to lend to
private sector particularly to SMEs.
Referring to the Prime Minister Youth Loan Scheme
that is being conducted through NBP, he said, “bringing
these disenfranchised segments into the banking sector
is a challenge we are taking on and the industry as a
whole must also.”
Given the decline in general price levels and the
central bank’s accommodative stance, the writing is on
the wall for interest rates. So will the banks be able to
beef up private lending as banking spreads shrink?
“Falling oil prices have brought a respite to inflation.
The government has lost some revenue also, but it can
put the fiscal house in order with the help of transac-
tions like disinvestment from HBL,” he said, adding that
a relatively satiated government appetite for domestic
borrowing coupled with expected improvements in
economic growth will drive banks towards private
sector lending. “It is simply better margins,” he said,
asserting thinning spreads will complete the potion that
will make banks fancy consumer lending again.
The banking veteran is sure that some banks will
emerge as clear winners in coming months. “The ones
that have a vibrant consumer banking product mix and
have worked diligently on credit cards and personal
loans, like Bank Alfalah and United Bank, will benefit
immensely as the economy picks up.”
But the buck does not stop at auto finance and credit
cards. “All vibrant economies have prevalence of
mortgage finance besides auto loans and credit cards. It
is not possible for an economy to prosper without all
three. We need to develop the mortgage finance
segment collectively as an industry,” said Kamal
pointing out the need for efforts from the regulator,
banks and other stakeholders.
Naturally the conversation drifted back towards the
role of the government. “Government should borrow
directly from public instead of going through banks,”
Kamal said in a matter-of-fact tone. He explained that
the depth in secondary debt market and competition
in attracting deposits will be among the positive
externalities of diversified domestic borrowing
sources for the government.
Lack of clean property titles and unfavorable
repossession laws are commonly cited impediments
to growth of mortgage financing. Very little progress
has been made on both fronts since the early 2000s,
but Kamal expressed confidence that will change
soon because the banks will be forced to lobby for all
those changes that can lead to a more conducive
lending environment. “They will do it now, because
now it will become a matter of survival for the banks,”
he concluded.
“All vibrant economies have prevalence of mortgage finance
besides auto loans and credit cards. It is not possible for an
economy to prosper without all three. We need to develop the
mortgage finance segment collectively as an industry,”
Interview by
MobinNasir&ZuhairAbbasi

Sidra Farrukh
Greenfinancing
The writer is a Research Analyst at
Business Recorder. She can be reached at
sidra.farrukh@br-mail.com
Certainly the drumbeat of energy crisis has crippled the economy of the country,
and one area in the banking sector that has immense potential is green financing.
Globally as well, soaring energy needs, volatile oil prices and deteriorating environ-
mental aspects have spurred green investments. Green finance is a broad term that
can denote to any financial investment for environmental sustainability. Particularly
for the banking sector, PricewaterhouseCoopers Consultants define it as financial
products and services, under the consideration of environmental factors through-
out the lending decision making, ex-post monitoring and risk management
processes, provided to promote environmentally responsible investments and
stimulate low-carbon technologies, projects, industries and businesses.
While green financing is a relatively new term for Pakistan, the banking sector
has started taking baby steps into this segment; a significant numbers of commer-
cial banks including National Bank of Pakistan, Bank Alfalah Limited, Allied Bank and
MCB are moving towards energy efficient operations where most of these commer-
cial banks have opted to run their ATMs on solar power. Most of them are also
coming up with different solar power products. These involve solar projects at micro
level like roof top installations for households, 500W-5KW customisable home
solutions, and loans for tube well conversion to solar power in agri sector.
Here, the role of microfinance banks in the country is worth mentioning as
they actually opened up space in green financing for the big banks. Microfinance
players like Tameer Microfinance Bank and Khushhali Bank have joined hands with
technology providers to offer an array of solar home solution based on unique
models like Pay-as-you-go (PAYG) and Plug-and-Play. The microfinance institutions
are providing solution between 30 -100W for bottom of the pyramid market that is
off the national grid.
The focus seems to have set with funding solar energy solution as of now
perhaps due of its vast potential; Pakistan falls in one of the richest solar belts. A US
study shows that the total potential of the country to create power from solar
energy is around 18000MW. The country enjoys better solar radiance compared to
the world leaders in solar power like Germany and other Scandinavian countries.
So what is the viability of such financing products? Lending in such a segment
comes with a pinch of salt. According to industry players and experts alike, the key
factor for it is the technical plan and the quality of service and the biggest caveat for
banks offering solar solutions at micro level is the existence of many private
providers in for a quick buck. Though these players are not offering funding
facilities, they pollute the industry, spreading mistrust as they lack technical
feasibility and planning.
Also, structuring green financing can be complex; because it is eccentric and
still uncommon, it requires more legal creativity than the conventional financing.
While there are specific set of rules and requirements for the traditional lending,
financing for alternate energy, and that too at micro level, is in its nascent stage in
the banking sector. Also borrower awareness is still low to attract them to these
solar arrays.
On the other hand, the returns are quick on solar energy solutions; even if
technology, which is dynamic, is kept constant, the payback is around 4-7 years
along with economies of scales.
The regulatory requirements also play critical role when it comes to bank
lending. Though the renewable energy policy talks little about allowing households
to produce solar energy and put excess production on national grid, government’s
recent initiatives are encouraging.
State Bank of Pakistan (SBP) has recently amended its housing finance
prudential regulations to allow banks to offer loans to individuals for solar energy
solutions for residential use at affordable finance as part of home loans. Previously,
these loans were extended by the financial institutions as personal loans for a
maximum period of five years. After the recent amendment by SBP, the tenure for
solar energy solution funding stands at maximum ten years, making products with
4-7 year payback viable.
These efforts will not only provide a platform for green financing to flourish,
but also have positive impact on mortgage finance. Alternate Energy Development
Board (AEDB) is also in working to promote clean energy financing; it is looking
forward to a new study about the country’s renewable potential to be completed
which correlates the existing satellite data with new ground stations to generate
bankable data.
So, the grass is certainly greener on the green financing side. The financial
institutions need to put their best foot forward in making their contribution towards
the energy sector muddle.

Housefinanceandcorporate
lendingtothrivein2015
BR Research: How did you find 2014 for
the banking sector?
MianMuhammadMansha: It was a very
good year for the bigger banks, and this has
been putting pressure on the smaller banks.
There are issues in the smaller banks, and State
Bank of Pakistan should encourage bigger
banks to takeover smaller banks. This is a
world-wide practice; the number of banks in UK
and US has reduced after a very active M&A
activity in their banking sector. The option for
smaller banks to exist on standalone basis is to
focus on a particular niche.
While 2014 was celebrated by bigger
banks, I believe that the results will start
tapering off in 2015 as we face falling returns
on PIBs in a low interest rate environment.
Banks will have to reduce their intermedia-
tion costs aggressively. For this we are trying
to expand and bring more people into
banking to increase our deposit base. Also,
the banks need to control other expenses
like energy and other overheads.
It is unfortunate that the deposit-to-GDP
ratio in the country has actually gone down
from 35 percent in 2003 to 32 percent today,
whereas it is almost double in India. And with
no vivid growth in the economy, the
lending-to-GDP ratio stands at 16 percent,
while it was above 20 percent somewhere in
2003. I would reiterate that we need to bring
more people in banking.
BRR: What is MCB’s loan book like in
comparison to that of other banks?
MMM: We stand at a much better position in
2014. We cleaned up certain things; we came
out with better schemes in problem areas of
consumer lending like housing loans and car
loans. The model that we are now running is
reducing the interest cost on the loan
according to the equity the borrower brings
in. Somebody who brings in more equity will
be charged as one of our better clients.
Similarly, after the revamping of costs, our
borrowing on credit cards is also increasing.
Car loans have also increased partly because
of the market, and partly because of our efforts
to make them attractive for the borrowers.
Today, we are at the highest level of what we
have ever lent. And we need to continue
lending money to people who create jobs.
BRR: Why do you have to worry about
lending when you can put money in
government securities?
MMM: The argument that the banks do not
need to lend as they can park most of their
funds in government securities is flawed.
And so is the idea that banks lend to only a
specific super-rich clan. The government
gives us the interest rate, but it is actually the
yield that we are after. Yield only comes in
when we get over and above the interest rate
from our lending. It is a misconception that
banks don’t want to lend.
BRR:Withtheinterestratescomingdown,
whichsectorareyoueyeingin2015?
MMM: One such sector is housing finance
where a lot of overseas Pakistanis are also
involved. We would like to focus more on this
sector by giving competitive rates. Another
need of the hour is the energy sector; there
are many small energy projects that we will
look into. We are also trying to improve the
capacity of the existing customers.
Also with the government raising funds
from privatization proceeds, and with CSF
also coming in, banks will have to explore
options other than lending to the govern-
ment. Here, I see additional corporate
lending by the banking sector in 2015 as
most of the energy projects are quite
capital-intensive.
We are also looking at expanding globally.
The potential in Iran is huge, and once
sanctions are removed, we are planning to
look into opening a bank there. We are also in
touch with the Afghan officials for a bank in
Afghanistan, and we are also applying for a
bank in India.
BRR:Howbigahindranceisforeclosure
requirementsinhousefinanceinPakistan?
MMM: It’s a significant hurdle in Pakistan as
there are many legal issues and default cases
here. MCB has the lowest NPLs because this
is where we are good at: we consider
ourselves as good relationship managers as
we carve clients based on their history and
our thorough judgment.
BRR: Can banks attain the 4.5 percent
gross spread as proposed by the SBP?
MMM: I think the banks should try to come
close to it. I personally think that the bigger
banks would be able to achieve it as our
other income is quite a lot, but it will be a
challenge for some of the weak smaller
banks that have balance sheet related issues.
I suggest that these banks should be merged
either with bigger banks or with other
smaller banks.
BRR: What should the banking sector
focus more on: Capital Adequacy Ratio,
or Minimum Capital requirement?
MMM:In Europe if you have a Capital
Adequacy Ratio of seven percent you are
considered good; we have 25 percent. In that
context, our top five banks are very healthy
banks. So, I reckon that the banking sector
should focus both on the Minimum Capital
Requirement and the Capital Adequacy Ratio.
BRR:Wheredoyouseegrowthrateand
interestratesgoingfromhere?
MMM:WithIMFonourbacks,wewanttocreate
moredepositsintheindustryandmaintain
exchangerates.Iseeinterestratesgoingdown
butnotdrasticallylowifwewanttoincreasethe
savingrate,incentivizedepositgrowthand
containcurrencyfluctuations.
Asfarasgrowthisconcerned,alldependson
theongoingwaronterror.Oncewesucceed,
whichwehavetoaswedonothaveanyother
option,Iseeaspellofgrowthinvariousindustries
likeinfrastructure,energy,electricityetc.
Interview by
AliKhizar&SidraFarrukh
Mian Muhammad Mansha | Chairman, MCB
BR Research caught up with Mian Mansha at his residence one afternoon last
month. What followed was a discussion on MCB’s plans for regional expansion,
thinning banking spread, the need for mergers and acquisitions in the industry, and
the business sectors that he is eyeing. Below are edited transcripts.

Agriculture Finance in Pakistan-
Moving towards growth
and sustainability
Dr. Saeed Ahmed
Majority of the world’s poor, an astounding number of over
two billion people share one common profession: farming.
But where agriculture harbors so many of the world’s poor; it
also offers the key to graduate economies out of the vicious
cycle of poverty and food insecurity. Beyond direct links to
rural livelihood, agricultural sector has strong links to the rest
of the economy, and this is one of the most powerful ways in
which it generates overall growth and reduces poverty.
Empirical evidence suggests that investment in agriculture is
2.5 to 3.0 times more effective in increasing the income of the
poor than is non-agricultural investment.
Based on this premise and the strong linkage between
agriculture finance and economic growth as documented
through a host of research and global experiences, State Bank
of Pakistan (SBP) has continued to make relentless efforts to
promote agriculture finance. A rear-view of this long rocky
uphill journey on the road to agriculture finance development
shows that State Bank and the banking industry together
have achieved some proud milestones to nurture the
transition of Pakistan into a more diversified and faster
growing economy.
The seed of change was sowed with State Bank’s
decision in 2005 to move away from its ‘mandatory credit
regime’ where force-feeding of targets to heavily regulated
banks was the norm with little, if any, consideration given to
market forces and business prospects; towards a more open
and ‘market led’ model where State Bank adapted itself to the
role of a facilitator and developmental partner of financial
institutions to fecundate the growth of agriculture finance in
its natural eco-system. Since then SBP has worked persistent-
ly to foster an environment which is conducive for the
development of agri-finance.
While setting aggressive indicative credit targets in consulta-
tion with banks, SBP has simultaneously ensured that the
right tools and policy framework are also made available for
the banks to make a strong business proposition in serving
their rural clientele. Its interventions not just involve address-
ing regulatory barriers but also developing market informa-
tion & infrastructure to address industry bottlenecks and
market failures. It has continuously been working to enhance
capacity of banks in modern agri-financing and to reduce
demand-side barriers such as low financial literacy. The
results of these interventions have been impressive! Agri-fi-
nancing disbursement which stood at a modest Rs212 billion
in FY07-08, has seen splendid growth to reach a remarkable
figure of Rs391 billion in the outgoing year of 2013-14 with
Agriculture Credit Advisory Committee (ACAC) pushing the
limits to an even more exigent credit disbursement target of
Rs500 billion to be achieved during FY14-15. While a Rs109
billion (28%) jump in credit target over the previous year’s
actual disbursement of Rs391 billion may seem ambitious, the
progress so far appears to be promising and speaks volumes
for the strong dedication and commitment that the industry
players have collectively shown to the cause of promoting
agriculture finance.
Disbursements for the first eight months of FY14-15 have
been Rs289 billion which constitutes 58 percent of the total
target of Rs500 billion is 32 percent higher compared to
Rs218 billion disbursed in the corresponding period, last year.
Numbers speak for this favorable trend indicating a gradual
closeout in agri-financing gap between credit demand and
supply which has been brought down from 63.5 percent in
Gap (as % of demand)SupplyDemandYear

FY10 to 47 percent in FY14, and continues to shrink further
with the exponential growth in targets and their achievement.
The growth in agri-credit supply has gained momentum in
recent years to surpass the growth in agri-GDP. With each
passing year, new boundaries are being defined to deepen
the roots of agri-credit and encompass an increasing number
of farming households into the formal financial ambit. Amid
an environment where private sector credit is dwindling and
‘crowding out’ is being chanted as headline news, this
favorable trend is corroboration of the fact that the grass is
turning greener against all odds.
To augment this stellar performance, banks have also
managed to increase the outstanding portfolio by Rs34 billion
to Rs308 billion along with curtailing the non-performing
loans to 11.4 percent of the total portfolio as against a
previous figure of 13.8 percent. Alongside these achieve-
ments, the agri-financing landscape has also changed for
good. Where the overall pie has grown in size, a shift in
market share has also been witnessed away from the
traditional approach of specialized and government led
financial institutions being the only significant players in
agri-lending to a more market led model wherein private
sector banks are increasingly exploring opportunities in what
was previously ‘an unchartered territory’.
At present, the number of participating financial institutions
has risen to 33 financial institutions (as opposed to only 20
institutions in 2010) which not only include the top-tier
commercial banks and specialized institutions but the horizon
has been widened to include microfinance and Islamic banks
into the agri-financing ambit too. For instance, while the agri
target of ZTBL in absolute terms has grown, its market share
has shrunk from 31.6 percent in 2007-08 to 18 percent in
2014-15, indicating healthy market competition.
To achieve its mission of providing an enabling environ-
ment for the growth of agriculture finance, SBP has taken a
holistic approach which goes beyond the old-school approach
of policy framework and regulatory purview to thoroughly
cover aspects of risk, technology, innovation and capacity
building. SBP has taken initiatives to promote agri-financing to
bring depth, inclusion, efficiency and stability into the system.
As an illustration to its approach, State Bank has aided in
mitigating significant risk of crop financing through its Crop
Loan Insurance Scheme (CLIS) with significant funding
support by the Federal Government for subsistence farmers.
The effectiveness of this can be witnessed in the 2010-11
floods wherein claims of over Rs1.4 billion were paid to
farmers which significantly reduced the infection potential of
banks’ agriculture portfolio besides giving relief to the
farmers. CLIS has played a pivotal role the in robust growth of
agri-credit disbursements. Besides benefiting large borrowers
of affected areas it has also strengthened the trust of banks in
financing to farmers exposed to the vagaries of nature and
that too at the time of fast emerging global climate change.
Livestock contributes half of the agriculture GDP,
however largely remained unattended by formal financing. To
address the inherent risk of livestock financing, Livestock
Loan Insurance Scheme has also been introduced through
which, it is hoped that financing will be channelized to this
important area too, which is crucial to the overall growth and
wellbeing of the agriculture segment.
To stimulate demand for formal credit, SBP has been
closely involved in capacity building initiatives. Through its
Farmers’ Financial Literacy Programs, SBP has targeted
thousands of farmers in all provinces and AJK to educate them
about managing personal finances and proper loan utilization
which are essential life skills for combating poverty. Over
90,000 farmers have been touched in over 2000 grass root
level programs conducted by SBP trained field staff since 2012.
SBP has been a proponent of innovation and technology
and has shown its strong commitment and support for all
initiatives that can add value to its mission of developing
agri-finance as a viable business line. Through donor funded
initiatives such as Financial Innovation Challenge Fund (FICF)
under the DFID-funded Financial Inclusion Program, SBP has
worked on and supported numerous innovations which
continue to transfer benefit to an increasing number of rural
households. One such intervention is the promotion of
Information and Communication Technology (ICT) which
offers the prospects of enhancing the delivery of a wide array
of financial products to reach a greater number of agricultural
clients. Also, SBP is supporting establishment of warehouse
receipt financing system in the country to address the issues
of post-harvest losses and collateral management against
commodities to benefit small farmers.
On the policy front, SBP has revised Prudential Regula-
tions for Agri-financing to remove regulatory impediments
and bring fluidity to the flow of credit to the farming commu-
nity. Under the revised PR, banks are required to develop an
agri-finance strategy and include agri-credit in the key
performance indicators of the respective officials. SBP has
also issued guidelines on various subjects such as Value
Chain Contract Farmer Financing, Horticulture, Fisheries and
Poultry Financing and Islamic Financing; to stimulate banks
into exploring business potential in each of these areas.
Through constant support and feedback, the central bank is
helping banks in developing products and the required
expertise to venture into these fields that have so much to
offer in terms of profitability, economic growth as well as
other social benefits.
Over arching these initiatives is SBP’s target allocation and
monitoring function wherein SBP works closely with banks to
ensure challenging targets are set and utmost efforts are
made to achieve them. It is through constant monitoring and
feedback that progress is ensured and any deviations are
addressed in a timely manner. Other than quarterly meetings
with regional management to review performance and
address issues, SBP plays a facilitation role to provide
maximum support to banks so that they don’t fall short of
their targets. The result of this constant push can be seen in a
steep upward trend of agri-credit targets where disburse-
ments are continually surpassing targets. The growth in
agri-credit has continued to outpace the growth in agricultur-
al value-added in GDP and is fast catching up to bridge the
gap between credit demand and supply. Disbursements for
the first half of FY14-15 have been Rs219.5 billion which
constitutes 44 percent of the total target of Rs500 billion is 38
percent higher compared to Rs159.4 billion disbursed in the
corresponding period last year.
They say the journey of a thousand miles starts with a single
step. The ‘single step’ taken towards incubating agriculture
finance has started to bear fruit. Change has come in the form
of a move from mandatory to market-based regime, from
cooperatives to commercial banks, from sharing of bonafide
losses to credit guarantee schemes and banks willingly
financing agriculture.
Going forward, the most critical challenges are inclusion
of majority small and marginalized farmers, addressing
geographical imbalances and financing to non-crop activities,
which will lead to enhancing the share of agri-credit in banks’
advances. SBP is committed to continue its efforts to deliver
real benefits to the farming community and it is hoped that
with the joint efforts of policy makers and the industry,
agri-financing would soon emerge as a sound, scalable, and
sustainable business segment for banks in Pakistan.
*The writer is a PhD in Economics from the University
of Cambridge, UK, presently serving as the Director of
Agricultural Credit & Microfinance Department at the
State Bank of Pakistan, Karachi. He can be reached at:
dr.ahmed@sbp.org.pk
Changing market structure of agri-financing
FY07-08
Agri-GDP growth v/s growth in credit supply
FY14-15

BR Research: Is the local banking system geared up to
finance upcoming energy projects like LNG?
Atif Bajwa: The banking sector is keen to finance the upcom-
ing LNG projects. We will assess the sponsors, suppliers and
technology, and will play our role in these projects.
However, the banking sector’s capacity to finance large
projects in the infrastructure space is still limited and is
dependent only on loans, which should not be the only way to
finance a project. Efficient local capital markets are the
foundation for a thriving private sector. Access to finance for
the private sector, and particularly for small and medium
businesses, is severely constrained due to lack of fully
developed capital markets.
The development of the local capital market needs to be at a
much faster pace as it is not sufficient to depend solely on the
lending capacities of banks to generate investments. Banks
need to take into account their risk appetite and cannot be
excessively exposed to risks in any particular sector. The
banking sector is already overly exposed to risks associated
with the energy and power sector. Concerted efforts need to be
taken to not only set up private equity funds, but also to
formulate effective rules and regulations that provide a
conducive environment for new investors to enter the market.
Encouraging investors will play a catalyst role in financing
infrastructure projects.
BRR: How was the banking sector’s performance in 2014?
AB: During the year, the banking sector took full advantage of
the major re-composition of Pakistan’s domestic government
debt by increasing investments in Pakistan Investment Bonds
(PIBs). This window of opportunity was available for a limited
period and the yields have now dropped significantly. Banks
with excess liquidity were able to transfer their short-term
investments into long-term bonds and earn higher yields. Bank
Alfalah also took advantage of the opportunity and now has a
government security profile that is ranging from short-term
treasury bills to 10-year bonds.
At Bank Alfalah, we are pushing to increase private sector
lending. However, this is very challenging in an environment
where the industry average of NPLs is at 13 percent and
economic growth has been static at three to four percent for
the last few years. Economic growth needs to increase for
investments to take place and for banks to lend more.
The criticism that banks often face for not lending enough to
the private sector is sometimes misplaced. Lending generally
comes in to support financeable projects only after sufficient
equity investments have been committed by entrepreneurs.
Unfortunately, entrepreneurs are still somewhat shy of making
meaningful equity investments for new businesses (barring the
usual sectors). It is also important to note that in emerging
economies, new project financing is usually undertaken by
Development Financial Institutions (DFIs) whereas in Pakistan,
complete dependence is on commercial banks for project
financing. There is a dire need for DFIs in the country.
BRR: So what will be your strategy in 2015?
AB: As a business, Bank Alfalah has never stood still. We have
rapidly expanded our network, invested in new technology
and built one of the best teams in the industry. As a result, we
felt it was time for our brand to reflect who we are and where
we are heading.
The year 2015 marks a year of new beginnings for Bank
Alfalah. This year we will differentiate ourselves, really connect
with our customers and create a world class brand. We have
embarked on a journey to re-invent ourselves and create a new
vision for the Bank. The new Bank Alfalah brand tells the story
of how we have always been different and how we have
defined our own rules of success. That spirit gives us license to
challenge the market, to shake things up and stand for
something nobody else stands for.
Customers are the focal point of Bank Alfalah’s business
model. Understanding our customers’ needs, developing
innovative financial solutions and building long-term relation-
ships are the foundations of our commitment to our customers.
With our strategic thrust heavily focused on customer
centricity, we strive to harness and deliver innovative,
responsible and sustainable financial solutions for our
customers. We will continue to focus on consumer, SME,
commercial and large corporate clients. Being the leading
consumer lender, Bank Alfalah has an advantage and we will
strengthen our consumer portfolio going forward.
Small and medium enterprise growth is also a focal point of
our strategy and prudent, responsible lending will be extended
to support this critical area of our economy. Bank Alfalah’s SME
business understands the holistic needs of our customers and
provides complete SME Banking solutions to them. We are
looking to provide end to end solutions, which focus on
meeting the financial, non-financial, transactional, investment
and advisory needs of our SME customers. This year, through
our branchless banking network, we will also launch automat-
ed financial services for SME and micro retailers with the aim to
include the masses into the financial mainstream.
BRR:WhatisBankAlfalah’splanforitsIslamicbankingsegment?
AB: Islamic banking is a high growth segment because of the
growing demand. With a network of 157 dedicated branches
across the country, Bank Alfalah’s Islamic banking business
continues to serve as the one of the largest Islamic banking
offering in Pakistan. Bank Alfalah’s Islamic banking business
was awarded the 'Best Islamic Banking Window of a Commer-
cial Bank in Pakistan' by the Global Islamic Finance Award,
which is considered one of the most prestigious awards in the
field of Islamic banking.
Going forward, we plan to maintain our strong position in
this sector. We are keen to spin off our Islamic window
operations into a subsidiary over a period of time, as also
encouraged by the State Bank.
The Islamic banking environment is becoming very
competitive as more banks are coming in. The SBP is rigorously
working to provide a conducive environment for Islamic
banking. However, there is a need to build asset and invest-
ment classes. Islamic instruments need to be developed to
cater to the unique needs of customers.
BRR:Howhasbeenyourexperiencewithbranchlessbanking?
AB: Bank Alfalah launched “Mobile Paisa,” its branchless
banking services in collaboration with Warid Telecom last year.
Mobile Paisa offers customers over the counter bill payments
and money transfer facilities at more than 15,000 agent
locations nationwide. Within less than six months, we have
registered a four percent market share and plan to grow. With
the launch of Mobile Paisa, the Bank aims to support the
creation of a branchless banking and alternate payments
ecosystem, which is likely to augment financial inclusion in the
country, reducing the gap between the banked and the
yet-to-be-banked.
Going forward, I am confident that Bank Alfalah will continue
to innovate and perform well, driven by new product innova-
tions and exemplary customer service.
Interview by
AliKhizar&SidraFarrukh
Debtcapitalapressingneed
Mr. Atif Aslam Bajwa has been the Chief Executive Officer of Bank Alfalah Limited since
October 27, 2011 and has been its President since November 2011. Mr. Bajwa serves as
the President of Abu Dhabi Group. Mr. Bajwa served as the Chief Executive Officer and
President of Soneri Bank Limited until March 2011.
AtifBajwa
CEO Bank Alfalah Limited

Definitely, banks couldn’t have asked for more in CY14!
Followed by a lackluster period, banks made a stellar
comeback on local bourse this year. As the benchmark
KSE100 index gained 27 percent, BR banking index outran
with a return of 32 percent. This was both a result of the
government raising debt at hefty rates with banks becoming
the major lender and the SBP opting for a monetary easing
stance as the year came to its close. This gave banks merry-
making sessions throughout the year while keeping the
sector in limelight on local bourse.
Rising PIB-DR differential
Tripping down the memory lane, long-term bonds i.e. PIBs
happened to be the most sought-after investment avenue for
most banks as yields offered were too lucrative to ignore.
Mind you, the differential between PIB and discount rate
stayed on the higher side, averaging at 281bps versus 188bps
between CY12-CY13. This coupled with anticipations of falling
interest rates prompted banks to shift their portfolios to PIBs
from treasury bills earlier to lock in higher yields.
In the course of chasing hefty yields on risk-free govern-
ment securities, bankers set aside their very core objective,
thereby restricting their lending to the private sector. This
kept the advances-to-deposits (ADR) ratio restricted to 48
percent (CY13: 49 percent), while taking the invest-
ments-to-deposits ratio (IDR) to as high as 58 percent. This
marks the highest IDR and the lowest ADR in the banking
industry ever since 2008 (see graph).
Yet, this did not bother banks as risk-free high yields
furnished banks with lower Non-Performing Loans (NPLs),
increased coverage. With cleaner loan books, the industry
now boasts a remarkably high coverage ratio of 80 percent
coupled with a lower infection ratio of 12.3 percent as of
December 2014.
Besides, income from higher yielding PIBs also triggered the
topline growth while augmenting the Net Interest Margins
(NIMs). This was also the result of banks mobilising their cost
of deposits during the year. With the SBP imposing minimum
savings rate on saving deposits, banks were seen expanding
the proportion low-cost deposits, thereby keeping their cost
of deposits in check. Hence, profitability of the sector
witnessed a staggering lift during the year.
Revaluation gains – a feast for banks
After almost a year of stagnant discount rates, the SBP tilted
its stance towards monetary easing whereby it slashed the
discount rate by 50bps in mid-November 2014 and later by
100bps to 8.5 percent in January 2015. As a consequence, the
yields on 10-year bonds tanked to 10.87 percent from as high
as 13.45 percent during the year. Hence, with long term
sovereign securities now representing a sizeable share in the
portfolios of most banks, substantial revaluation gains on PIBs
gave banks a fair pick up.
Rising spreads and profitability growth
With a myriad of factors being in favour of this sector, banks
made fortunes this year as their bottomline growth remained
hefty. Combining all banks, profitability of the sector grew by
a healthy 45 percent year-on-year. Mind you, the last two
years have been very lackluster for banks. With the profitabili-
ty growth remained heartening; the sector succeeded in
winning back investors’ hearts on the stock market.
Banks in 2015:
Considering that inflation is thinning out, the discount rate is
expected to go down further. Hence, the PIB appeal is likely to
lose steam as fresh issues will be offered at lower rates
following interest rate cuts. Eventually, bank’s reliance on
sovereign instruments will fizzle out. Till then, banks can
capitalize on their existing PIB holdings in the form of
revaluation gains. Here, banks with the highest allocation in
PIBs will be the clear winners. But sooner or later, restricted
NIMs will be the inevitable outcome. In such a case, banks will
be propelled to revisit their investment mix by shifting their
focus on lending to the private sector.
Still, much depends on the willingness of individual bankers
to lend as they have been enjoying cleaner books of late.
Chances are that banks will be prudent in lending to keep a
check on their NPLs and hence aggressive lending is unlikely
to be seen in the near future. However, sector analysts are of
the view that economic revival and improving energy
situation in the country will carry the potential of taking credit
growth in double digits.
Analysts also believe that baking profitability appears to be
relatively secure considering the dependency of banks on
income from PIBs coupled with the linkage of deposit rate
with the repo rate as interest rates move south.
One sticky situation for banks in CY15 could be the regula-
tion of banking spreads. To recall, banks have been reveling in
generous spreads in recent times. But with SBP pulling the
strings of bankers to confine their spreads to 4.5 percent, the
bankers with healthier spreads are likely to bear the brunt.
The writer is a Research Analyst at
Business Recorder.
Alookback
tobanksin
CY14
Alookback
tobanksin
CY14Rabia LalaniRabia LalaniRabia Lalani

Draftmortgagerecovery
lawstobefinalizedsoon
Ashraf Wathra | Governor, State Bank Of Pakistan
BR Research: With inflation trending around 4.5 percent,
don’t you think the policy rate is still too high?
Ashraf Wathra: We should not be riding only on international
oil prices. We need to see other improvements and watch the
external sector as well. Therefore, we should not be moving in
haste with policy rate adjustments. Our approach will be
cautious and measured.
BRR: Talking about external account, how can we control
non-essential imports?
AW: That is certainly a point of concern for us. Some of the
non-oil, incremental imports are justified because it relates to
textile machinery and equipment, which will be used for
productive purposes and ultimately, exports. But a chunk of
those imports are, in my view, quite non-essential. We had a
meeting with banks some days ago and I made that point with
the banks that they must themselves take measures to curb
non-essential imports.
BRR: How can the banks do that; do they have a mandate
for it?
AW: They can do it through their credit policy by being relatively
stringent on non-essential imports. If voluntary measures don’t
work, then we will consider regulatory measures.
BRR: What kind of measures are we talking about here?
AW: We will discuss that with the Ministry of Commerce
because import and export policies are essentially their
domain and when it comes to regulatory measures we will
also take the Ministry of Finance on board.
BRR: So you are talking about fiscal tools?
AW: No, we are talking about cash margins.
BRR: Our exports have been stagnant, though there has
been some improvement in textile exports after GSP+.
Have you considered any monetary measures that can
boost export competitiveness?
AW: If you go back to the budget announcement, we gave
incentive pricing on export refinance, at rates lower than the
previous year. Hence we facilitated exports through that
measure. Likewise, long-term finance for export projects also
Mr. Wathra’s association with the SBP started when he assumed charge of the office of Deputy Governor (DG), State Bank of Pakistan (SBP) on March 11, 2013. The
Federal Government had notified Mr. Wathra’s appointment as DG, SBP on March 5, 2013 for a period of three years from the date he assumed office.
Mr. Wathra brings 35 years of commercial & investment banking experience to his new assignment. Prior to joining SBP, he was serving the National Bank of Pakistan
(NBP) as its Senior Executive Vice President & Group Chief, Credit Management Group, since October, 2012.
Mr. Wathra holds extensive experience in restructuring and reorganization of business units. He has extensive knowledge of investment banking and commercial
banking operations, trade finance products and underlying delivery systems

received additional incentives through incentivized pricing on
those loans. That is the purview of the central bank and if need
be, we will review those rates. But when it comes to exogenous
factors like law and order issues in certain industrial areas or
power outages, then other state organs have to play an
effective role as it is not the central bank’s domain.
BRR: The REER is evidently higher while there is a global
slowdown. Does that not strengthen the case to allow
exchange rate depreciation to make exports more
competitive globally?
AW: We do not operate a fixed exchange rate regime. And the
prevailing parity in the market is a function of demand and
supply. Very recently, Russia tried to defend their exchange
rates. They tried very hard; making dollar purchases and
hiking the interest rate to 17 percent. We have seen this
happening in many other markets. So we are not trying to
protect the value of the domestic currency.
BRR: But if REER has appreciated, isn’t it the responsibility
of the central bank to restore equilibrium.
AW: Any manipulation can be seen in a very different light so
the SBP does not want to manipulate the rate. Let the market
perform its function.
BRR: What is the SBP doing to spur lending as banks have
not been giving loans to private sector despite the fall in
interest rates?
AW: Now we are talking about enforcement. Yes the policy
rate has gone down by 150 basis points in the last two reviews
and yet there is no reflection of it in private sector borrowing.
We have held a meeting with the banks and made this point
with them; we want to see gross spreads coming down by
June 30 2015. Such things happen best if done voluntarily, as
we are inculcating a free market. But if we don’t see any
benefit being passed to borrowers, then we will take regulato-
ry measures; we always have the regulatory choice to fix
gross spreads at a maximum of 4.5 percent. But you know
financial intermediation and policy rate are not the only
determinants of private sector credit off-take. There are
structural issues at play.
BRR: Don’t you think there is rent-seeking by the banks?
The banks buy government paper, and then SBP injects
huge chunks of liquidity through treasury bills.
AW: I agree that banks’ appetite for risk is compromised
because of easy access to T-bills and bonds and they need to
be pushed through persuasion. If that doesn’t work, we can
make them do it. We will be watching their spreads on a
monthly basis and we expect results sooner than June-end.
We have a very compliant industry and there is no reason
why the banks will not voluntarily reduce spreads.
BRR: The issue is that banks do not have to compete. They
get low cost deposits and park funds with the govern-
ment. How is the SBP creating competitive environment to
benefit savers?
AW: If you look at our bank deposits, you will find that
compared to the region and other comparable economies,
the percentage of current and demand accounts is relatively
higher. Our depositors prefer these over savings accounts,
fixed deposits or national savings.
This is because there is lack of financial literacy for which
we have been running courses all over the country. It may
also be belief-based and banks take advantage of that.
So we have an issue here and it is unusual. However, in last
2-3 years we have improved significantly, especially due to
alternate delivery channels where the number of accounts
and transactions are increasing by the day.
BRR: How can we improve financial literacy?
AW: A financial literacy and inclusion program is currently
being developed by a World Bank team for Pakistan. The SBP
took an initiative to include their experience and expertise in
this project and they are helping us develop the plan for that.
The basic idea is to expand the base from 35 million deposi-
tors by creating facilities that serve this goal. The number of
bank branches is increasing so our coverage is also getting
better with the ATM network and microfinance network.
Financial inclusion is a transition. Even if the banks in rural
areas begin with simple savings accounts, eventually there
will be a time when the depositors will display appetite for
other banking products.
BRR: Mortgage finance industry has not developed in the
country to date. What steps have been taken to create
long-term financing market?
AW: The last time the recovery law was amended was in 2002
and that was a great development after a struggle of many
years. That amendment allowed banks to repossess properties
in case of non-performance by the borrower. Subsequently, in a
Supreme Court decision, that empowerment was shot down.
Now we are in a market where the recovery cases in banking
courts can last 20 or even 50 years. If you look at the
countries where mortgage finance is well developed,
repossession laws are quite clear and the process is quick.
The banks would be very keen and excited to promote
mortgage finance once we can sort out our recovery laws.
There is a new draft amendment that has been prepared in
consultation with stakeholders and we hope to present it to
the government soon since that is critical for developing
housing finance in the country. In a recent survey, our finding
was that we need nine million homes. The government has
already announced its intent to tackle this challenge.
Another development worth mentioning is that HBFC was
dysfunctional for many years and it owed SBP substantial
amount; about Rs13-14 billion including profit. We proposed to
the government that this corporation will never be able to pay
back this amount so it should be converted into equity.
Consequently the SBP is now the largest shareholder in
HBFC and we are working hard to ensure viability.
BRR: What about other shortcomings like the absence of a
long-term yield curve?
AW: The market will evolve if this issue is sorted out.
BRR:Howdoyouthinkthebankscouldhelpineconomicgrowth?
AW: I think the focus of the industry should be on developing
entrepreneurs and markets; not plain vanilla lending and
deposit accumulation only. As a growing economy, we need
to find and support new entrepreneurs.
BRR: Do you think the banks are geared up for boosting
consumer finance?
AW: I think if we go back to pre-2000, the consumer finance
segment did not exist and that was the first round they had in
the early 2000s. Some banks got too gung-ho with it but
perhaps they have learnt lessons and will approach the same
products more prudently this time around.
BRR: Let’s talk about the KASB saga. How do you justify
SBP’s actions?
AW: Our action is primarily aimed at protecting the depositors,
which are around Rs50-60 billion. Regulators have to take such
actions and it is an international norm. We used to have 3-4
banks in that category. All of them had earlier agreed a
roadmap with the central bank and all the others were achiev-
ing those milestones except this one. Every month they had a
new release but they did not live up to any of their own plans.
BRR:Couldn’tyouhaveaskedabigbanktomergewiththem?
AW: How would we do that? Overnight? Due diligence
requires time, and without a moratorium, if few banks had
commenced due diligence of another bank, the media would
report it as a bank going down the drain. There would have
been a crisis. We take these steps after a lot of calculations
and very serious considerations. Other markets like India, Sri
Lanka have a lot more incidents like this but we do not
because we take such prudent steps.
BRR: What will happen to the depositors?
AW: In the financial history of Pakistan, no depositor has ever
lost money and we will ensure that these depositors will also not
lose any of their money. The maximum time available for this is
six months from the date of announcement of moratorium.
Interview by
AliKhizar&MobinNasir
if we don’t see any benefit being passed to borrowers,
then we will take regulatory measures
The focus of the
industry should be
on developing
entrepreneurs and
markets; not plain
vanilla lending
and deposit
accumulation only
“
“

900
2,100
3,300
4,500
5,700
6,900
50%
55%
60%
65%
70%
75%
CY08 CY09 CY10 CY11 CY12 CY13 CY14
Rs(bn)
Banks inclined towards low-cost deposits
Deposits (RHS) CASA
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
CY08 CY09 CY10 CY11 CY12 CY13 Jun-14
Rs(bn)
Other deposit Accounts Fixed Deposits Call Deposits
Saving Deposits Current Accounts
Breakup of industry deposits by account type
32%
36%
2%
23%
0.34%
Current Accounts Saving Deposits Call Deposits
Fixed Deposits Other deposit Accounts
Saving deposits grab largest chunk (Jun-14) Breakup of industry deposits by depositer
type (June-14)
Personal Prviate Sector enterprises Government
Non-Financial SOEs Others
No. of Bank Accounts
Average deposit per bank account
Average Deposit size (L.H.S)
20
25
30
35
40
130
150
170
190
210
230
250
CY08 CY09 CY10 CY11 CY12 CY13 Jun-14
(mn)Rs('000)
8%
11%
14%
17%
20%
150
250
350
450
550
650
CY09 CY10 CY11 CY12 CY13 CY14
Rs(bn)
NPLs Loan Coverage Infection Ratio (R.H.S)
Asset quality of banking sector growth
shows signs of improvement
Category-wise NPLs to total loans
0
5
10
15
20
25
30
35
%
Public Sector Commercial Banks
Local Private Banks
Foreign Banks
Specialized Banks
Category-wise coverage ratio
Local Private Banks
Foreign Banks
Specialized Banks
45
55
65
75
85
95
105
%
Category-wise ROA
Local Private Banks
Foreign Banks
Specialized Banks
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
%
Banking innumbers

Financing mix of
Islamic banking industry
Murabaha
Ijarah
Musharaka
Mudaraba
Diminishing Musharaka
Salam
Istisna
Qarz-e-Hasna
Others
0.02
0.06
0.1
0.14
0.18
0.22
Islamic banking infection ratio
Infection Ratio - Islamic Banking Infection Ratio - Industry
300
400
500
600
700
800
400
550
700
850
1000
1150
Rs(mn)
Islamic banking branch network
No. of Branches (L.H.S) Average Deposit per branch
Category-wise ROE
Local Private Banks
Foreign Banks
(6.0)
(3.0)
0.0
3.0
6.0
9.0
12.0
15.0
18.0
Segment-wise advances and infection ratio (Dec'14)
0%
5%
10%
15%
20%
25%
30%
35%
40%
50
450
850
1250
1650
2050
2450
Corporate SME Agriculture Consumer
Finance
Commodity
Finance
Staff Loans
Rs(bn)
Advances (L.H.S) Infection Ratio
30
130
230
330
430
530
630
730
830
930
0%
10%
20%
30%
Rs(mn)
Agribusiness
Transportation
Cement
Chemicals
Financial
Individuals
Energy
Electronics
Sugar
Textile
Top-10 sectors (in terms of lending) and their infection ratio (Dec'14)
Advances (R.H.S) Infection Ratio
Islamic Industry Assets (L.H.S) Share in Banking Industry
0.04
0.05
0.06
0.07
0.08
0.09
0.1
0.11
200
350
500
650
800
950
1100
1250
1400
Rs(bn)
Phenomenal growth of Islamic banking industry over the years
20%
30%
40%
50%
60%
70%
80%
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Rs(bn)
Assets skewed in favor of investments
Total Assets (R.H.S)

“Risk”defining asset mixZuhair Abbasi
“It is bit of a chicken and egg question,” is all what a top
current banker had to say when asked what is behind the
now-established, seemingly never ending love affair between
banks and government securities. Whether it is the govern-
ment’s unfathomable domestic borrowing appetite or
genuine decay in banks’ willingness to lend is still debatable.
The last year when advances of the sector were still
growing faster than investments in absolute terms, was way
back in CY08. The advances-to-deposit ratio (ADR) was
comfortably in the 70s and investment-to-deposit ratio (IDR)
in the mid-20s. But in CY09 the investments came in pouring –
the IDR bar raised his head and never looked back. The IDR
and ADR graph is a chartists’ dream – very rarely are graphs
talking this loudly.
All said every single calendar year in the past five has seen
investments outpacing advances by quite some margin. The
IDR now stands at near 60 percent. A former State Bank of
Pakistan Governor pointed out that banks were more worried
about the rising NPLs then the mark-up yields even during
low interest rate scenario, which is why they shied away from
lending since CY09.
The infection ratio in the five year period starting from
CY09 has averaged 16 percent, significantly higher than the
10 percent average infection ratio in the five years period
leading to CY09. The level of nonperforming loans has been
the most decisive factor in banks assessing their asset mix
strategy. “The persistent energy crisis has the biggest shout in
banks tilting their asset mix. Of all available variables, the
infection ratio has the highest correlation with the ADR, which
explains the recent trend more than the discount rate or the
level of spreads,” told a State Bank of Pakistan ex-governor.
You would think the banks’ lending practice has a lot to do
with a country’s GDP growth. It ideally should, as a World
Bank report clearly states a positive correlation of 0.9
between GDP growth and ADR around the globe. But Pakistan
is an exception – a big one. In Pakistan’s case, the GDP-ADR
correlation, if you can call it that, is very weak at 0.49 for the
past ten years. It has not been always the case, the post CY10
movements have been difficult to understand, which is where,
when banks are labeled ‘lazy’, it deserves some merit.
Banks having faced the brunt of toxic assets in CY08 have
been rather cautious. As soon as the infection ratio inched to
double digits, the ADR started slowing down, and investments
kept surging. A positive correlation of 0.85 between ADR and
infection ratio substantiates the argument. Even a slowdown
in discount rate, gradual decline in infection ratio and
declining spreads were not enough to pull banks out of the
slumber – as profit making came through the rather easier
route of investments in sovereign papers.
Consider this: investments by the end of CY14 were where
the sector deposits were just four years ago. They are at a
level, higher than advances have ever reached in this country.
They have almost trebled in four years. The whole exercise in
the name of debt re-profiling played right in the hands of
bankers sitting back and they grabbed the opportunity with
both hands.
So what is with the spreads then? How much pressure have
they coped? Pretty well it appears. Banking spreads have not
followed any pattern in the past ten years. Sector average
spreads at 5.9 percent stood at a multiyear low in CY14 and at
least that should have called for a shift in asset composition.
Recall that spreads were the highest in CY11, when infection
ratio reached its peak of 18 percent and ADR for the first time
went below 50 percent.
Interesting is the fact that both spreads and ADR and
discount rate and ADR have had absolutely no correlation, in
the past 10 years. Banking spreads have now slid for three
consecutive years. Even the infection ratio is coming down,
albeit, slowly. Yet the banks do not feel the need to alter
strategy to counter sliding spreads. And they have good
reason for that. The effort has rather been put in buttressing
the deposit mix and cash on the lucrative yields in govern-
ment papers.
There is a wide belief that banks are now faced with no
option but to start lending to the private and consumer
segments. But not all bankers agree. Some still think the
banks will rather have lower spreads than run high risk of
exposing assets to risky borrower. And the data supports this
argument. In an ideal world, banks should have gone all out
lending, when the spreads started to squeeze.
Even the first quarter of CY15, has not been much different.
The government’s will to borrow remains, and although the
yields have come down crashing, there is enough appetite out
there. Almost a trillion rupees in PIBs and treasury bills have
already been raised at significantly lower yields. Some bankers’
interviews for this publication hinted at the same, citing
foreclosure laws and energy problems as critical factors.
So low spreads or not, high GDP growth or otherwise, it is ‘risk’
that is defining banks’ asset portfolio. They have found
enough ways to work around with a thinner topline. They will
continue to endorse government’s sovereign papers;
regardless of the rate. Surely, if risk is that important a
determinant, something needs to be done about bankruptcy
laws, banking courts and the whole legal procedure. Financial
intermediation will remain a distant dream otherwise.
0%
2%
3%
5%
6%
8%
9%
0%
20%
40%
60%
80%
ADR-GDP mismatch
ADR (LHS) GDP growth (RHS)
Infection matters
Infection (LHS) ADR (RHS)
0%
20%
40%
60%
80%
0%
4%
8%
12%
16%
20%
Spreads don't bother
Spreads (RHS) ADR (RHS)
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
20%
40%
60%
80%
CY06 CY08 CY10 CY12 CY14
The writer is Senior Research Analyst at
Business Recorder newspaper. He can be
reached at zuhair.abbasi@br-mail.com

Banking Review 2014 highlights challenges facing Pakistan's banking sector

Banking Review 2014 highlights challenges facing Pakistan's banking sector

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