Access to Finance in NWFP

Access to Finance in NWFP
Sponsored by
The World Bank
Prepared by
Dr. Sohail J. Malik, Dr.Muhammad Khan Niazi, Ms. Hina Nazli,
Dr. Abdul Salam, Abdul Wasay and Others
Innovative Development Strategies (Pvt) Ltd.
August 2005

ii
Transmittal
Mr. Mudassir Khan
Finance Specialist
World Bank
Islamabad Office
The final report of the Study on Access to Finance in NWFP awarded to us is enclosed. We hope that the World Bank and Government of NWFP would find this report useful.
This report highlights our views on issues and constraints and presents suggestions on the subject. Although the study findings are tentative, given the paucity of the data available, I believe that they are pretty robust and well grounded on consultations with banks and non bank financial Institutions active in the NWFP, and the best practices adopted elsewhere. Access to data for us was a serious constraint and despite our best efforts its general lack of availability hampered our analysis. This data situation is also an indicator of the lack of transparency in this sector which does nit augur well for its development.
I take this opportunity to thank the World Bank for assigning this study to us. I also appreciate the cooperation of GoNWFP and its agencies for sharing data and supporting our work in implementation of the study. I also acknowledge the support from several close colleagues who contributed to the study in different ways.
Dr. Sohail J. Malik

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Table of Contents
Background ..................................................................................................................... 1
Institutional and Service Structure .................................................................................. 6
Financial Services Offered in NWFP ........................................................................... 12
Scheduled Bank ............................................................................................................ 17
Non Bank Financial Institutions (NBFIs) ..................................................................... 36
Micro-credit .................................................................................................................. 47
The Focus Group Discussions ...................................................................................... 56
Summary and Conclusions ........................................................................................... 60
Annexures ..................................................................................................................... 67

iv
Acknowledgements
The Authors would like to acknowledge a great debt to Mr Mudassir Khan, the World Bank task manager for this study who despite his numerous other commitments devoted considerable time to the development of some of the main findings and recommendations contained in this study. His greatest contribution was in terms of time he devoted to helping us access data.
.
Thanks are also due to Mr Zia Ur Rehman, the Finance Secretary to the Government of the NWFP and his colleagues for the time they gave the study team for discussions and for access to the Government of NWFP data. Thanks are also due to the representatives of the Banking and non bank financial institutions who met with us and discussed various issues affecting the development of the financial sector in Pakistan. Finally thanks are due to the stakeholders representing different walks of life who met with us and shared their experience and insight into the working of the financial markets in NWFP.

v
Acronyms
ABL Allied Bank Limited
ADB Asian Development Bank
ADBP Agriculture Development Bank of Pakistan
ATMs Automatic Teller Machines
BADP Barani Area Development Project
BCO Banking Companies Ordinance
BID Banking Inspection Department
BNFBs Bearer National Fund Bonds
BOK Bank of Khyber
BPRD Banking Policy & Regulation Department
BRI Bank Rakyat, Indonesia
BSD Banking Supervision Department
CBOs Community Based Organizations
CDNS Central Directorate of National Saving
CDs Certificates of Deposits
CIB Credit Information Bureau
CIF Community Investment Fund
COIs Certificates of Investment
CRR Cash Reserve Requirement
CTFS Commission for Transformation of Financial System
DAD Deposit Account Department
DASP Dir Area Support Program
DFIs Development Finance Institutions
DHs Discount Houses
DRO District Revenue Officer
DSCs Defense Savings Certificates
ECs Exchange Companies
FBC Federal Bank for Cooperatives
FECs Foreign Exchange Companies
FBs Foreign Banks
FCDs Foreign currency Deposits
FD Finance Department
FEBCs Foreign Exchange Bearer Certificates
FGDs Focus Group Discussions
FIs Financial Institutions
FMBL First Microfinance Bank Limited
FWBL First Women Bank Limited
GDP Gross Domestic Product
GoNWFP Government of NWFP
GOP Government of Pakistan
GPO General Post Office

vi
HBFC House Building Finance Corporation
HBL Habib Bank Limited
HFCs Housing Finance Companies
IBB Islamic Banking Branch
IBD Islamic Banking Division
IBP Institute of Bankers Pakistan
IBs Investment Banks
ICP Investment Corporation of Pakistan
IDBP Industrial Development Bank of Pakistan
IFSB Islamic Financial Services Board
IPS Investor’s Portfolio of Security
KB Khushhali Bank
LCs Letters of Credit
MRDP Malakand Rural Development Project
MBL Meezan Bank Limited
MCB Muslim Commercial Bank
MF Microfinance
MFIs Micro Finance Institutions
MOF Ministry of Finance
MRTBs Market Related Treasury Bills
MSDF Microfinance Social Development Fund
MSDP Microfinance Sector Development Program
MTBs Market Treasury Bills
NBFCs Non-bank Financial Companies
NBFIs Non-bank Financial Institutions
NBP National Bank of Pakistan
NCBs Nationalized Commercial Banks
NCCC National Credit Consultative Council
NDFC National Development Finance Corporation
NDLC National Development Leasing Corporation
NGOs Non-profit Government Organizations
NIBAF National Institute of Banking and Finance
NIM Net Interest Margin
NIT National Investment Trust
NPLs Non-performing Loans
NRSP National Rural Support Program
NSC National Saving Center
NSO National Saving Organization
NSS National Saving Schemes
OMOs Open Market Operations
PACRA Pakistan Credit Rating Agency
PBA Pakistan Banks Association
PBC Pakistan Banking Council
PC Privatization Commission

vii
PCBL Prudential Commercial Bank Limited
PDs Primary Dealers
PIBs Pakistan Investment Bonds
PICIC Pakistan Industrial Credit and Investment Corporation
PICICCB PICIC Commercial Bank
PMN Pakistan Microfinance Netwros
POs Post Offices
PPAF Pakistan Poverty Alleviation Fund
PR Prudential Regulation
PSCBs Public Sector Commercial Banks
PTCs Participation Terms Certificates
RDFC Regional Development Finance Corporation
RDNS Regional Directorate of National Saving
RFCD Resident Foreign Currency Deposits
RICs Regular Income Certificates
RSPs Rural Support Programs
SBFC Small Business Finance Corporation
SBP State Bank of Pakistan
SBP (BSC) State Bank of Pakistan (Banking Services Corporation)
SECP Securities and Exchange Commission of Pakistan
SLIC State Life Insurance Company/Corporation
SLR Statutory Liquidity Requirement/Ratio
SME Small and Medium Enterprises
SRSP Sarhad Rural Support Program
SSCs Special Saving Certificates
UBL United Bank Limited
VCCs Venture Capital Companies
ZTBL Zarai Taraqiati Bank Ltd

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Chapter 1
Access to Finance in NWFP
Background
Economic Growth, Poverty Reduction and Access to Finance
Greater depth and soundness in financial sector contributes to broad-based economic growth, which is the basic driver of poverty reduction. Efficient financial markets promote investment and productivity growth through their role in project selection, risk diversification, reducing asymmetries of information, improving resource allocation, and optimization of scale, time frame and technology. Strong financial systems help absorb shocks while shallow domestic financial markets have magnified international financial market turbulence, adversely impacting the poor. Weak financial systems and resulting financial crises entail huge fiscal costs that crowd out social and poverty related public expenditures. These fiscal costs impact the poor disproportionately if they are financed by inflation. Moreover, badly managed financial crises cause severe disruption to economic processes, erode capital stock, erase confidence in the banking sector, and set back poverty reduction efforts for long periods.
Improved access to financial services should help both consumers and producers to raise their welfare and productivity. Individuals can insure themselves against periods of low income or unexpected income fluctuations, and maintain their consumption standards through the accumulation of financial savings. For example, for a farmer, his savings provide some insurance to protect him against drought or crop failure. Savings also cater for future expenditure needs, whether expected (for example, for special family occasions like a marriage, or for purchase of significant assets such as a home) or unexpected events. The access to savings and borrowing opportunities could also have longer term welfare implications, permitting people to borrow when young (for example, for education) and repay and save for retirement when they are older and employed.
For a producer, access to credit for fixed or working capital enables an increase in production possibilities which can have far reaching implications not only for the producer but for patterns of employment, occupational choice and even economy-wide productivity and growth. Financing constraints have been shown to feature prominently among the constraints of small and medium-size enterprises in some investigations. Some studies claim the difficulty of access to financial markets to be the major obstacle to the expansion of their business activities, ahead of other factors such as macro instability, taxes, and street crime. Furthermore, the access to financial services for smaller enterprises directly impacts poverty due to a relatively higher employment potential of such enterprises.

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But expansion of supply of financial services to underserved segments of society can also pose particular difficulties for financial intermediaries such as banks. Limited provision of financial services cannot be simply interpreted as an unwillingness to provide such services. Lending to some segments, especially the very poor, may be very risky, as there may be a real difficulty in repaying, or temptation to not repay, with households at the margins of financial and cash flow resources. Persons with informal or irregular employment may face real difficulties servicing loans. The possibility of such problems imply that it is important for financial intermediaries to get information on their prospective clients, to assess their creditworthiness, but such information may be difficult to obtain reliably and costly to collect. Such difficulties can imply that even potentially good clients are underserved, and sometimes, entire communities may face limits on credit which cannot be increased in volume even by raising interest rates. Additionally, there are costs associated with the provision of financial services, and if the value of the services provided is small, or services are to be provided in sparsely populated regions, it may be difficult to cover such costs. Costs of administration may be high due to the need for intensive interaction with and low education of clients. Maintaining accounts may be costly as poor persons’ deposits (which can provide interest incomes to banks) may be low, while transactions needs (which are costly to provide) may be high. Such issues arise in all countries, but there may be country specific factors, for example regulatory requirements, which could impact on costs associated with the provision of specific financial services.
Purpose and Scope of Study
The study aims to identify ways of expanding access to finance in NWFP while acknowledging the specific factors limiting the expansion of financial services to individuals and enterprises of various sizes in rural and urban areas and to suggest measures to mitigate their impact. The study reviews the operation of financial markets in NWFP and attempts to assess the extent to which constraints to access operate, and to identify the nature of these constraints, at the level of different types of financial institutions and indifferent segments of financial markets. The study then seeks to identify alternative strategies for improved access based on international best practices. Finally, the study discusses public and private choices which could enhance the availability or reduce the cost of provision of such services, consistent with sound financial practices.
Measures of access and actions to expand access can vary depending on which groups of the underserved are being referred to. Financial exclusion - the inability to access necessary financial services in an appropriate form - can result from difficulties relating to conditions, prices, or marketing of financial services, or from self-exclusion, often in response to religious and cultural perceptions. The underserved groups may be defined in several ways. Poorer segments of society usually have disproportionately low access and the poor can be defined in terms of income or wealth/assets. Access may be poor in some

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sectors of public interest, i.e. agriculture, construction and mining in NWFP. Some geographic regions may have lower access, which may combine characteristics such as remoteness or sparseness of population with economic backwardness. Specific communities of persons or racial groups may be identified to be disadvantaged in terms of financial access. Additionally, the criterion of small size is often applied, particularly to producers, so that micro or small scale entrepreneurs are often identified to face special difficulties in accessing financial services, especially credit. Sometimes, more than one such characteristic may apply to a particular ‘underserved’ segment of the population.
Latest data are unfortunately not available. However, based on the key informants surveys carried out by this team, it is found that several different financial institutions (FIs) supply financial services in NWFP. These include scheduled commercial banks, specialized banks, government organization, insurance companies, and other non-bank financial institutions (NBFIs). These FIs offer a variety of services but the study focus is on saving (deposits taking, investment and collecting premium), lending, bill collection/discounting, and remittance services. FIs use a variety of financial instruments based on their niche and for serving specific market segments. The study analyses the past four years data on the financial services provided by FIs, their outreach and client characteristics, etc., with a view to assess the existence, density, depth and gaps and constraints on financial services provided in different market segments in NWFP. Given the predominance of the banking sector, the study examines its services in greater detail, particularly their accessibility to the relatively poor, agriculture sector, SMEs, etc. and investigates the potential for expansion of services to these underserved segments and sectors. NBFIs serve special development mandates for otherwise special and underserved market segments such as SMEs, housing, etc., through their niche-specified instruments.
Demand side perspective on financial services is crucial for a proper assessment of availability, their usefulness and areas needing policy attention. The study obtains this perspective through consultations with select groups of prospective consumers of financial services in focused group discussions (FGDs). Particular attention is given to an evaluation of financial sector reforms in the past many years with respect to their impact on access. All these research explorations aim to address the basic questions as to what factors can be associated with the provision of services and what policy measures can be taken to improve the access, particularly for the relatively underserved sections.
The study attaches special importance to microfinance (MF), since MF serves the needs of the poorest of the poor, the most underserved people and enterprises at the bottom rung of incomes, and attempts to push the poor out of poverty and make them bankable. A range of MF institutions including NGOs operate in NWFP, but in line with global experience, their share in total financial services is very small. The MF issues and tools are quite different; lending is through community organizations on high mark up rates; and needs a lot of information and skills for effective credit supervision, etc. MF is quite risky and labor intensive also, being a facility for the poor who have low capacity to pay

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and requires special supervision skills; hence it is very costly compared with conventional lending services. Providing for these constraints is not an easy task. While accepting the significant role of these factors, the present study focuses on microeconomic issues affecting the distribution of credit services, and explores the possibility for a more proactive microeconomic role for the public policy with regard to financial access.
Possible Measures of Access
Conceptually, a series of alternative indicators may be devised to measure or monitor access and track the results of policy initiatives. Simpler measures can be constructed based on easily available statistics, but these measures have limitations in their interpretation. More sophisticated indices of access require the collection of specialized data which makes them difficult to construct or to use for comparative purposes. Some alternative approaches are discussed below.
A simple group of indicators of access is institutional presence, i.e., the supply of financial institutions or service points for the delivery of financial services. This could refer to a count of different types of financial institutions (banks, NBFIs, MFIs, etc.), or number of branches, service posts, ATMs, etc., of such institutions. Listings of such institutions are usually available. Availability of such statistics at the geographic level can provide indicators of service availability by region or area. Limitation of these measures is that in their simplest form they do not indicate the extent to which these service outlets meet the demand for financial services. Some modifications can be introduced by presenting the indicators as ratios, e.g., bank branches per unit of population, or population per unit. Another limitation is that all institutions do not provide the same levels of service; some may be larger and more comprehensive in terms of service provision. With changing technology, institutional presence may become less important for the delivery of financial services, which can be undertaken remotely through the phone or web, without the need for physical presence.
Another group of measures is the volumes of deposits, credits, assets or net worth of financial institutions in specific areas. These measures alone also have limited usefulness; the operational level of a financial institution in a given area gives no indication of which types of clients it serves. For example, even in a relatively poor area of the country, a bank may choose to focus its services on the richer segments of the population.
More detailed supply side indicators of access attempt to look at volumes of services provided to particular client categories. Different types of financial services can be examined; deposits, credit as well as other transactions such as payments and money transmissions, the provision of card facilities, etc. If the target groups of underserved persons (low income/poor clients) could be identified directly, such indicators would be very valuable. However, it may be difficult for FIs to have reasonable information on client incomes. Often the size of financial transactions is used as a proxy, i.e. small

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deposits or small loans, but this can clearly misrepresent client income. These indicators can more easily be applied to identify services provided to disadvantaged communities with specific socio-economic characteristics, such as sector, gender, etc.
Measures of the extent to which the demand for financial services is met are more difficult to construct than the supply side indicators. The unfulfilled demand is not only conditional on a specific service price, but it also depends on other conditions of service (such as distance, convenience, etc.,) as well as on the risk characteristics of the individual or enterprise; hence it is difficult to measure. Broad proxies of credit needs for enterprises, especially working capital credit needs, can however be constructed, based on turnover, raw material needs and other data. The credit needs for fixed capital, being ad hoc, are difficult to proxy. Individual credit needs, or the needs of micro-enterprises which do not separate personal and business needs are harder to assess. Measuring demand for savings or deposits or other financial services also poses similar difficulties. Since survey/census based indicators of individuals, households or enterprises are more demanding in terms of time and resource, the assessment of financial constraints is typically based partly on client group perceptions and related information such as refusals to provide services.
Some broad-based measures of access could also be constructed based on the pricing of financial services. Critical variables in this context are the interest rates or the commissions charged. While interest rate levels would clearly affect overall volumes of access and hence financial depth, the rate structures can focus more specifically on access issues. A broad measure in this regard is the average spread between borrowing and lending rates. Disaggregation of spreads and examinations of the composition of spreads can also lead to the monitoring of trends in subcomponents of spreads. Concerns about access could also be more specifically tracked by looking at the interest rate structure in greater detail; for example, prices of consumer credit, housing loans, rural/agricultural credit; and also by examining the degree to which price discrimination may operate across different segments, and assessing the presence or absence of market segmentation.
The present study bases its analyses on institutional presence by branches, availability of the four key services/measures the access, deposits, lending, remittance and bill collection/discounting, further analysis of FIs’ outreach, client characteristics, etc. The supply side information on institutions and services is buttressed by client perceptions through FGDs with select groups of clients in strategically selected districts. These choices are dictated by data paucity although the study makes use of international best practice where possible.

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Chapter 2
Overview of Financial Sector of Pakistan
Institutional and Service Structure
A variety of financial institutions provide financial services in Pakistan, including banks, NBFIs, insurance companies and CDNS. These institutions can broadly be categorized in three major groups: banks including development banks and DFIs under the supervision of SBP; the institutions regulated by SECP including leasing companies, modarbas, mutual funds, housing finance companies, venture capital, and discount houses, and insurance companies; and CDNS and POs directly controlled by the federal government. These institutions are listed in Annexure ? and summarized in Table 2.1. .
The financial institutions provide a variety of services. Commercial banks are more wholesome institutions providing almost all financial services of taking deposits, lending, bill discounting, remittances, etc. The exception is only specialized banks which primarily focus on the financing needs of agriculture and industry. Hence commercial banks dominate the sector in terms of volumes of business. Micro finance banks (MFBs) have tiny operation in terms of total lending. Some leasing companies and NGOs are also active in extending micro finance. The lines of division of business among FIs are fading overtime. DFIS, investment banks, leasing companies and modarbas provide deposit and lending services like banks, although their operating ratios may be quite different. For example DFIs would rely more on equity and CDs and lend more for plants and machinery, and so on. Almost all NBFIs have or had their
Table 2.1. : Financial Institutions Operating in Pakistan
As on 31st December 2003
Category
Number
Scheduled Banks
Commercial Banks
Public sector
5
Private sector
Domestic
18
Foreign
14
Specialized banks
3
Micro Finance Banks
2
NBFIs
Development Finance Institutions
7
Investment Banks
14
Leasing Companies
25
Modarabas
40
Housing Finance Companies
4
Mutual Funds
37
Discount Houses
4
Venture Capital Companies
4
Insurance Companies
Non-life insurance
Private sector
Domestic
45
Foreign
3
State Owned
1
Life Insurance
Private sector
Domestic
2
Foreign
2
State Owned
1
Reinsurance
1
State Owned
Central Department of National Saving
1
PostOffice
1
Source: SBP financial Sector assessment 2003

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niche which is trespassed by others under the forces of innovation, competition, technology and statutory changes. Insurance industry manages and indemnifies financial risks and serves as a major institutional investor for capital and money market. Post offices and exchange companies mostly deal in money transfer services. Bills are mostly handled by banks although some Post Offices also collect utility bills. CDNS, in cooperation with banks and Post Offices, mobilizes public saving for the budgetary support. The service profile of leading FIs is summarized in Table 2.2.
Table 2.2 A Summary of Financial Services Available in Pakistan
Banks
NBFIS
Insurance
Governmental
NGOs
Exchange companies
Leasing
Modarabas
Mutual Funds
Housing Finance
CDNS
Post offices
Deposits
Current
X
X
X
X
Saving
X
X
X
Term
X
Investments
X
Lending
Industrial
X
X
X
SME
X
X
X
Trading
X
X
X
Running Finance
X
Consumer Finance
X
X
Microfinance
X
X
Letter of Credit
X
Credit Cards
X
ATMs
X
Discounting
X
X
Remittances
X
X
X
Underwriting
X
X
Housing Finance
X
X
X
Islamic Financing
X
X
Bill Handling
X
X
The financial sector has recorded robust growth in recent years under the influence of growth revival and financial sector reforms. Overall assets of the financial sector rose to Rs 4.1 trillion in June 2003 from Rs 3.1 trillion in June 2001, showing an average annual growth rate of 15 percent. The size of the financial sector at this level constitutes 84.7 percent of GDP (at current market prices) in 2003 compared to 75.2 percent in 2001. The vibrant growth was largely in banks, mutual funds and insurance sub-sectors. Banks’ domination of the sector has thus been rising in recent years while the asset share of NBFIs has been falling. This structural change is largely is due to mergers/acquisitions of the NBFIs with commercial banks and banks expanding business activities in areas where

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the NBFIs were strong (e.g. auto/lease finance). The asset share of CDNS, which mobilizes funds for direct budgetary support, is also likely to decrease as the impact of financial reforms (profit rate rationalization on NSSs) grinds through fully. In 2003, banks accounted for 62.4 percent of total sector assets, while CDNS, insurance companies and NBFIs accounted for 24.1 percent, 7.3 percent and 6.3 percent, respectively (see Table 2.2).
The NBFIs share of assets, which had been declining until 2002, has increased in more recent years. The institution-wise break-up of NBFIs indicates that major contributors to this increase were DFIs and Mutual Funds. The assets of DFIs saw an impressive growth of 15.3 percent during FY03 on account of increasing business activities in general and investment activities in particular. During the same period, mutual funds almost doubled to Rs 56.2 billion primarily due to the boom in the equity market and capital gains on government securities.
Asset structure: Financial institutions mostly lend, invest or keep their resource in the form of cash, and in 2003, these asset heads accounted for 50.4 percent, 31.5 percent and 12.0 percent of the total sector assets, respectively [see Table 2.3]. However the asset composition has been changing due to changes in the ownership structure, fall in spreads, shifts in corporate investment demand with falling interest rates and refocus of financial institutions towards non-traditional areas like consumer finance, SMEs and micro-finance and agri-credit. Thus in recent years, advances and cash holding as percent of total sector assets have shown trends while the share of investments has risen sharply. DFIs have the largest share among NBFIs in overall advances and investments, followed by Mutual Funds and Leasing Companies in 2003.
Financial Credit
Private sector’s access to credit has been growing very fast during the last few years due to favorable demand and supply conditions in the credit market. With ample liquidity in financial system, interest rates
Table 2.3: Asset Structure of the Financial Sector
2000
2001
2002
2003
Assets (billion Rupees)
2,970.6
3,129.2
3,539.1
4,081.8
Asset Shares of Major Institutions
Banks
60.9
62.1
62.8
62.4
NBFIs
8.1
6.5
6.0
6.3
Insurance
7.0
7.1
7.2
7.3
CDNS
24.1
24.3
23.9
24.1
Financial Sector
100.0
100.0
100.0
100.0
Growth Rates
Banks
7.4
14.5
14.5
NBFIs
-15.7
5.6
20.2
Insurance
7.2
14.7
16.0
CDNS
6.5
11.1
16.0
Financial Sector
5.3
13.1
15.3
Assets as percent of GDP (at market prices)
Banks
47.7
46.7
50.5
52.8
NBFIs
6.3
4.9
4.9
5.3
Insurance
5.5
5.4
5.8
6.2
CDNS
18.8
18.3
19.2
20.4
Overall
78.3
75.2
80.4
84.7
Source: SBP (2003)
Table 2.4: Distribution of Scheduled Banks Credit (billion Rs)
As on
Change During FY04
Jun-03
Jun-04
Absolute
Percent
Fixed investment
241.8
354.5
112.7
46.6
Corporate sector
220.8
313.7
92.9
42.1
SMEs
21
40.8
19.8
94.1
Working Capital
265.7
403.5
137.8
51.8
Corporate sector
190.9
247.9
57
29.9
SMEs
74.9
155.6
80.7
107.8
Trade Finance
162.3
218
55.7
34.3
Corporate sector
112.7
163.8
51.1
45.3
SMEs
49.6
54.2
4.6
9.3
Agriculture1
202.2
198.7
-3.5
-1.7
Consumer credit2
45.1
142.3
97.2
215.4
Others
125
33.9
-91.1
-72.9
Total
1,042.2
1,350.9
308.7
29.6
Source: SBP (2003)
1 Includes commodity loans
2 Includes staff loans

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have touched the historical low levels while there has been a surge in the overall economic activities. Besides SBP has identified several new sectors and provided requisite guidelines for bank financing to give boost to the economy while maintaining prudential norms. Overall credit extended by the scheduled banks increased to Rs 1,350.9 billion at the end of FY-2004 compared with Rs 1,042 billion at the end of FY-2003. In end-FY-2003, the share of corporate sector accounted for 53.7 percent of total credit, SMEs’ share accounted 18.6 percent, consumer finance 7.6 percent, and agricultural credit accounted 8.0 percent.
Disbursement of agricultural credit has registered a remarkable improvement in recent years with enhanced role of commercial banks and PPCBL in agri financing. However the share of agri credit, a part of which may be treated as working capital finance, declined during FY04 (see Table 2.4).
Consumer finance has grown sharply in the last few years, with the largest share going in personal loans which include financing for consumer durables. The availability of auto loans has been the driving force behind the strong growth of the automobile industry. Housing finance has although stagnated despite the stated policy priority. Lending institutions have been unable to match the tenor of housing finance with tenor of their liabilities due to the lack of appropriate staff skills, experience in consumer credit analysis, and capacity to take risk. Well-managed consumerism is healthy and banks need to create capacity for prudent risk management with respect to consumer loans.
The SME lending has shown a tremendous growth for both fixed investment and working capital in recent years. Outstanding credit to SMEs has increased from Rs 145.5 billion in June 2003 to Rs 250.6 billion in June 2004. SBP has been closely monitoring the growing volume of SME finance and its associated risks, and issued separate prudential regulations for SME finance.
Micro finance is also gaining weight as an effective tool of social mobilization and poverty alleviation through market-oriented self-employment and income generation schemes. A variety of institutions are providing micro finance services, ranging from NGOs, to banks, leasing companies, and private and government sponsored rural support programs. Presently two specialized MFBs are operating in the country. Two commercial banks also provide special lines of credit for the micro finance sector. MFBs have been expanding very fast their branch network and lending operations; MFBs’ advances increased by 49.3 percent during CY03. One-third of the total MFB clients are females, livestock sector has the major share in micro loans followed by micro enterprises and agri inputs.
Islamic modes of financing are being introduced, in line with global trends. By end-June 2004, an Islamic bank and 13 stand-alone branches in five banks had started Islamic finance operations. These banks are using a wide range of products for financing, including corporate ijarah, consumer ijarah, trade/project financing, export and import

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morabaha financing etc. The assets of these Islamic banks/branches almost doubled, from Rs 33 billion in FY01 to Rs 68.4 billion during FY03.
Financial Savings
People avail saving services from several sources. The biggest source is deposits at Banks which rose by 19 percent to 1,687 billion during FY-2003. The share of deposits in financial institutions (mostly scheduled banks) has maintained an increasing trend in recent years due to the recent revival of economic growth, increased workers’ remittances and massive expansion of some credit lines. With equity roughly remaining around the statutory levels, the availability of cheaper funds in the form of deposits explains the declining share of borrowing, which is considered a relatively expensive source. Thus in 2003, the respective shares of bank liabilities were: deposits 78.6 percent, borrowing 14.3 percent and owners’ interest 7.1 percent. NBFIs’ share of deposits is very small (about 1.5 percent in FY-2003). Many people keep their savings in NSSs at CDNS; NSS accounted for about Rs 1 trillion or about 30 percent of financial saving in FY-2003. The share of CDNS is likely to decrease in coming years as the rate reduction on NSS grinds through. A significant share of financial savings is kept in the form of hard currency; this share averaged 14.7 percent in FY-2000-03.
Ownership control of the financial sector has witnessed a radical change. The share of asset held by the private financial institutions have been rising persistently over the last many years. This change has been brought about by privatization of public sector financial institutions, mergers and acquisition of a number of foreign banks with private sector commercial banks, aggressive business activities of the private banks and surge in activities of existing NBFIs largely on account of the boom in equity markets. Excluding CDNS, the private sector banks jointly with the foreign banks holds around 70 percent of total assets of the sector.
Some improvement has been observed in the asset structure of insurance industry although it is still heavily skewed towards state owned insurance companies, in both non- life and life insurance sectors. The share of State Life Insurance Corporation (SLIC) was 70.5 percent in CY03 but declining. Similarly in non-life insurance, National Insurance Company (NICL) occupied about 10 percent share in CY03. In addition, the country also has one reinsurance company for non-life insurance companies in the public sector.
Payment system remains in a transition. Automated and electronic means of financial transactions are gradually replacing the paper-based system, and the use of credit, debit and ATM cards is growing rapidly. However, the value of transactions routed through ATMs is still very small. The Central Depository System (CDS) has made significant inroads in the trading and settlement of equities listed in the three stock exchanges of the country.

11
In sum, the financial sector appears to have registered a marked improvement in its performance in recent years. Reportedly, the financial system is better equipped to cater to the credit needs of growing economy, and its resilience to both internal and external shocks has increased. Intermediation costs measured in terms of spreads have come down, due to increasing competition among financial institutions, low inflation rate and limited scope for further cuts on deposits rates, which have plummeted to abysmally low levels. Despite the squeezed margins, the sector profitability has risen; the recorded return on average assets (after tax) was 1.4 percent in FY-2003 compared with the generally accepted benchmark of 1.25 percent and negative rates a couple of years ago. The rise in profitability is being attributed to the increased business activities of the financial sector as is evident from the substantial rise in credit expansion and investments. Besides the sector has been realizing huge amounts from off-balance sheet sources of income, fee, commission, etc., massive capital gains on fixed income government securities and increased trading in equity stocks. Finally the liquidity position of the financial sector has remained comfortable.
The improvements have partly been brought about by revamping of regulatory and supervisory practices. Prudential Regulations have revamped and comprehensive guidelines provided to the banking sector, covering a wide range of commercial banking operations, agriclutral lending, consumer, SME and micro finance. Various changes have been introduced in the banking supervisory mechanism to ensure proactive monitoring of the risks and a minimum level of prudence. CIB has started maintaining credit history of individuals to avoid over-leveraging by taking several loans from various banks and it has been made mandatory for all banks engaged in consumer finance to become a member of a CIB. Except for DFIs, the regulation for NBFIs has been assigned to SECP which has implemented prudent corporate practices in parallel.
The financial sector is however faced with some real credit and market risks. With easy availability of funds, the sector has explored relatively new areas for increasing their asset base. However the sector lacks sufficient expertise to deal with these newly explored areas, which may undermine the asset quality. A substantial holding of fixed income government securities by the banks and NBFIs is also a source of concern, as an upward movement in interest rates can lead to capital losses. Similarly, investments in stock market shares by banks may be another potential source of losses and a trend reversal in the equity market can lead to erosion in their capital base.

12
Chapter 3
Financial Services Offered in NWFP
Data on the financial sector in the NWFP is extremely scanty. However, some provincially representative household survey data are available on household financial assets and liabilities, and loans that can help in forming some idea of the relative dimensions vis a vis the rest of the country. Table 3.1 below provides information on these variables for NWFP and Pakistan as a whole using the data from the HIES 2001/02. Only 1.5 million households responded about their savings in bank all over Pakistan1. Of these, 22 percent belong to NWFP. Information on loans is provided by 7.7 million households.
Only 13,000 households responded about the money received from any group insurance. Most of these households belong to Punjab (67%) followed by NWFP (22%) and Sindh (11%). There was no reported money received from Insurance in Balochistan.
Table 3.1: Financial Assets/Loans Reported by Households in NWFP and Pakistan – 2001/02 (%)
NWFP
Total
1. Proportion of households (%)
Households with savings
22.06
100
(1,519)
Households currently have loans
18.32
100
(7,720)
Households who repaid loan last year
24.92
100
(1,400)
Household who received group insurance
22.28
100
(13)
2. Proportion of amount (%)
Total savings
17.45
100
(111,980)
Profit earned on these savings
14.88
100
(2,893)
Current loans
8.72
100
(758,926)
Amount of loan repaid
19.05
100
(24,157)
Amount of interest paid
9.26
100
(1,243)
Amount received through insurance
5.80
100
(1,501)
Source: HIES (2001-02)
Notes: Figures in parenthesis are actual numbers in thousands. Parentheses against line heading 1 indicate ‘000’ households and against line heading 2 indicate million rupees.
1 These are only 8 percent of total households.

13
Table 3.2 Households with Savings and Loans as percent of Total Households in NWFP and Pakistan (%)
NWFP
Total
15.70
14.01
Households who earned profit on savings
1.08
0.99
Households with current loans
66.25
71.22
Households who repaid loan
16.34
12.91
Household who paid interest on loans
0.50
0.75
Households who received insurance
0.13
0.12
Total households (000)
2,298
18,134
Source: HIES (2001/02)
According to the HIES 2001/02, in NWFP, 335 thousand households reported a total savings of Rs. 19,536 million. This means average saving per saving household per year was Rs 58,294. Households earned a reported profit of Rs. 430 million on this amount. The number of current loans was 1,415 thousand, amounting to Rs. 66,192 million in this province. Households paid Rs 115 million as interest charges on loans during 2001/02 in NWFP.
Nearly 1.4 millions households repaid loans in Pakistan during this year. Among these, 25 percent were from NWFP.
The total amount reportedly received through payments from general insurance was only Rs 1.5 million for the country as a whole out of which the share of NWFP was 6 percent. As expected, non-poor households save much larger amounts than the poor households and therefore the amount of profit received is higher for non-poor. Poor households are found to be under heavier burden of loans as compared to the non-poor. They however, repaid a much lesser amount than the non-poor. Differences between the poor and non- poor in the amount received through insurance were not found to be very significant. Household expenditure was cited as the main purpose of obtaining loans by most of the households irrespective of their poverty status and place of residence.
Table 3.3: Percentage Distribution of Savings/Loans by Poverty Status
Poor
Non-poor
Both
Total savings
11.19
88.81
100.00
Profit earned on these savings
5.36
94.64
100.00
Current loans
73.07
26.93
100.00
Amount of loan repaid
22.57
77.43
100.00
Amount of interest paid
6.91
93.09
100.00
Amount received through insurance
46.85
53.15
100.00

14
Table 3.4 Percentage Distribution of Households with Savings/Loans by Poverty Status in NWFP and Pakistan
NWFP
All Pakistan
Poor
Non-poor
Poor
Non-poor
11.07
19.32
8.39
18.37
Households who earned profit on savings
0.55
1.49
0.29
1.53
Households with current loans
72.55
61.32
79.12
65.09
Households who repaid loan
15.38
17.09
11.73
13.83
Household who paid interest on loans
0.46
0.54
0.41
1.02
Households who received insurance
0.00
0.24
0.07
0.15
Households with savings/loans
91.64
93.94
64.71
56.44
Total households (000)
1,023
1,275
7,316
10,818
According to interviews with informed persons, the financial sector appears to have been growing very fast in NWFP in recent years. FIs are expanding their institutional presence and diversifying their products and services with improved technology, and banking and regulatory practices. Reportedly, there is a considerable improvement in the sector size, diversity, its soundness, both on account of the on-going reforms and the increased economic activities.
Several kinds of financial institutions supply financial services in NWFP. These include scheduled commercial banks, specialized banks, government organizations, insurance companies, and other non-bank financial institutions . The scheduled banks dominate the financial sector in line with global trends. These banks offer a variety of financial services, they collect accept deposits through current, saving, fixed-term and CDs, and PLS accounts, lend money for investments, SMEs, trading, consumer finance, etc., discount bills, make remittances, underwrite, etc. Banks have been expanding their outreach very fast in NWFP in recent years. The federal government is next largest operator in the sector. The CDNS and post offices (POs) take deposits and collect insurance premiums for using the proceeds for the budgetary support. Reportedly, the share of funds mobilized through these schemes is falling since the rates of return on national saving schemes have been slashed significantly. The share of PO is small in terms of saving mobilized but the PO has a very large outreach. Several NBFIs are attempting to expand their operations in NWFP. NBFIs design financial instruments based on their niche for serving specific segments of the financial market. The main actors are insurance companies, a couple of leasing companies, modarbas, mutual funds, and housing finance companies. These operations of these NBFIs are growing very fast over a small base; hence despite a rapid growth, the total share of NBFIs in the financial sector in NWFP appears very small.
Overall, the province appears to be underserved in terms of financial access. The cited reasons for this low access are the relatively low socio-economic development, existence of a large underground economy, poor law and order situation, and religious and cultural

15
values. Instability and misuse of industrial policy in the past has led to numerous industrial failures and non-performing loans. Particularly, the Gadoon industrial estate debacle has given a jolt to industrial and banking sectors in NWFP. FIs are hesitant to expand their branches in remote rural areas because of relatively low demand and the law and order situation. People also tend to keep their money with themselves rather than in low-yield deposits at banks. Except for BOK, the headquarters of FIs are located outside NWFP, mostly in Karachi. FIs provide saving/deposit services in NWFP and transfer most of the saving, so mobilized, to their headquarters for lending/investment elsewhere. Creation of BOK, a provincial bank, was justified on these grounds. Since industry and corporate sector is small, lending is mainly for SMEs, agricultural, and commercial/trading activities. More recently, lending for consumer finance, mostly in urban areas, has increased significantly.

16
Chart 3.1 Share of NWFP’s Financial Sector in Gross Provincial Product and Services Sector of the
Province
3.6
3.0
3.4 3.1
2.9
6.1
5.0
5.6
5.2
4.8
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004
Years
Percent share
Share in GPP Share in services sector
Source: GPP-NWFP (2005).
According to the Labour Force Survey (2001/02), Pakistan’s financial sector absorbs 282
thousand persons. Of these, 90 percent were concentrated in Punjab and Sindh, and only
8.5 percent were in NWFP. The employment in the financial sector of the NWFP
accounts for less than 1 percent of the labour force of NWFP.
FIs are expanding their presence in NWFP under the influence of improved economic
prospects, increased demand for consumer durables, stock market prospects, increased
competition and turnaround in the financial sector, and better technology and regulatory
practices. According to the stated policy, the SBP plans to close/merge the banks at the
smaller end. Hence banks are scrambling for early presence in uncovered places, issuing
new instruments and trying to exploit their niche. One such area which is expanding is
the Islamic banking; banks have devised Islamic instruments both on the saving and
lending sides and some banks have dedicated branches for Islamic banking. Similarly,
leasing companies, modarbas, mutual funds and other NBFIs are vying to expand their
outreach.

17
Chapter 4
Scheduled Bank
Scheduled banks dominate the financial sector in NWFP in terms of their presence and size of operations like deposits and advances. According to an estimate, 2,847 bank branches were operating in NWFP at the end of 2003, representing 12.2 percent of the total branches in Pakistan. The NWFP is 9.4 percent of the total land area and 13.4 percent of the total population of Pakistan. Density of branches per million persons is almost equal to the national level, an average of 48 branches in NWFP against 50 braches for Pakistan. More specifically, the NWFP has less branch density than Punjab but more than Sindh and Balochistan. Area-wise, the branch density is much better than the national average, 11 branches per thousand square kilometer relative to an average of 8 for Pakistan (see Table 4.1). This conspicuous difference is mainly due to very low branch density in Balochistan.
Of the total of 46 scheduled banks operating in Pakistan, 23 banks have institutional presence in NWFP including the two specialized banks. All major banks of Pakistan have branch operations in the NWFP. NBP ranks highest in terms of number of branches, followed by HBL, UBL, ABL, MCB, ZTBL and BOK. The major bank branches constitute 95.3 percent of the total branches in NWFP. NBP has 10 percent of its branches in NWFP; ABL 14 percent; and HBL has 13 percent. The FWB, a women bank, has 4 branches in NWFP out of the total of 39 branches. The Bank of Khyber is the provincial bank of NWFP and has 24 branches operating in NWFP out of the total of 30 braches. The IDB and PICICCB primarily focus on industrial development finance, and have 10 and 6 percent of their branches located in NWFP, respectively. Presence of foreign banks is very small in NWFP; presently there is only one foreign bank branch, i.e. of Standard Chartered Bank (see Table 4.2).
Bank branches are mostly located in the urban areas; the estimated proportion of urban branches is 64 percent. The rest are in semi-urban rural areas. Of the urban branches, more than two-third are located at the district headquarters. In six districts all bank braches are urban and located at district headquarters. In Peshawar district, 97 percent of the urban branches are in Peshawar city. The access among districts is also extremely unequal; while 19% of total bank branches are located in the Peshawar district, the 12 less developed districts in south and north, i.e. Batagram, Kohistan, Shangla, Upper Dir, Chitral, Malakand and Lower Dir in the north and Bannu, Lakki Marwat, Hangu, Tank and Karak in the south, account for only 18% of bank branches (see Table 4.3).
With privatization of four large banks, HBL, UBL, MCB and ABL, the share of private bank business has risen to about three quarters of all banks. Hence the competition
2 SBP, Financial Sector Assessment 2003.

18
Table 4.1: Dispersion of Scheduled Banks
Density
Branches
Area
Population
Branches
Branches
nks
per
per million
Persons
(#)
Sq km
('000)
1000 sq km
persons
per sq km
Punjab
3,821
205,345
73,621
18.6
52
359
Sindh
1,424
140,914
30,440
10.1
47
216
Balochistan
267
347,190
6,566
0.8
41
19
NWFP
847
74,521
17,744
11.4
48
238
Peshawar
160
1,257
2,027
127.3
79
1,612
Swat
72
5,337
1,258
13.5
57
236
Mardan
70
1,632
1,460
42.9
48
895
Abbotabad
68
1,967
881
34.6
77
448
Kohat
67
2,545
563
111.0
119
221
Mansehra
61
4,579
1,153
13.3
53
252
Swabi
45
1,543
1,027
29.2
44
665
Haripur
39
1,725
692
22.6
56
401
Nowshera
34
1,748
874
19.5
39
500
D.I. Khan
30
7,326
853
4.1
35
116
Bannu
27
1,227
676
22.0
40
551
Charsadda
27
996
1,022
27.1
26
1,026
Lower Dir
24
1,582
718
15.2
33
454
Karak
23
3,372
431
6.8
53
128
Malakand
23
952
453
24.2
51
475
Chitral
19
14,850
319
1.3
60
21
Upper Dir
13
3,699
576
3.5
23
156
Tank
12
1,679
238
7.1
50
142
Buner
10
1,865
506
5.4
20
271
Hangu
8
1,097
315
7.3
25
287
Lakki Marwat
5
3,164
490
1.6
10
155
Shangla
5
1,586
435
3.2
12
274
Kohistan
4
7,492
473
0.5
8
63
Batgram
1
1,301
307
0.8
3
236
FATA
50
27,220
3,176
1.8
16
117
Kurram Agency
16
3,380
448
4.7
36
133
Khyber Agency
10
2,576
547
3.9
18
212
Bajaur Agency
8
1,290
595
6.2
13
461
N. Wazirastan Agency
7
4,707
361
1.5
19
77
Malakand Agency
3
4,813
235
0.6
13
49
Mohmand Agency
3
2,296
334
1.3
9
146
Orakzai Agency
2
1,538
225
1.3
9
147
S. Wazirastan Agency
1
6,620
430
0.2
2
65
Northern Areas
36
Islamabad Capital Territory
134
906
805
147.9
166
881
Pakistan
6,579
796,096
132,352
8.3
50
166
AJK
336
Grand Total
6,915
Source: SBP (2003)

19
Table 4.2: Share of NWFP’s Financial Sector in Pakistan
Branches in NWFP
Branches in Pakistan
Share of NWFP %
Deposits Rs million
Share of each bank
2003
2003
1997
1997
Allied Bank of Pakistan Ltd.
108
782
13.81
63,430
6.90
Askari Commercial Bank Ltd.
5
50
10.00
19,482
2.12
Bank Al Habib Ltd
1
59
1.69
13,445
1.46
Bank Alfalah Ltd.
4
45
8.89
13,445
1.46
Bolan Bank Ltd.
4
51
7.84
5,761
0.63
Faysal Bank Ltd
1
25
4.00
15,755
1.71
First Women Bank Ltd.
4
39
10.26
2,162
0.24
Habib Bank Ltd.
183
1,424
12.85
211,383
23.00
I.D.B.P
2
20
10.00
10,518
1.14
Kasb Bank ltd
1
19
5.26
0.00
Metropolitan Bank Ltd
7
35
20.00
9,608
1.05
Muslim Commercial Bank Ltd.
113
1,025
11.02
124,391
13.53
National Bank of Pakistan
158
1,183
13.36
254,863
27.73
PICIC Commercial Bank Ltd
3
48
6.25
0.00
Prime Bank Ltd
1
35
2.86
6,866
0.75
Saudi Pak Commercial Bank Ltd
2
28
7.14
0.00
Soneri Bank Ltd
2
39
5.13
9,845
1.07
Standard Chartered Bank
1
22
4.55
16,267
1.77
The Bank of Khyber
21
30
70.00
6,160
0.67
The Bank of Punjab
2
243
0.82
15,797
1.72
Union Bank Ltd
7
44
15.91
11,695
1.27
United Bank Ltd.
138
1,096
12.59
106,711
11.61
Zarai Taraqiati Bank Ltd
38
345
11.01
1,494
0.16
Total Banks
806
6,687
12.05
919,078
100.00
NBFIs (# of Companies)
Leasing Companies
6
29
21
Modarabas
1
38
3
Investment banks
1
12
8
Housing finance
1
3
33
Discount houses
Insurance companies
54
0
Post offices (Branches)
2,050
12,254
16.73
81,732
Urban
178
1,808
9.85
Rural
1,872
10,446
17.92
National savings
58
366
15.85
Source: SBP (2003),

20
Table 4.3: Regional Pattern of Sheduled Bank Branches in NWFP and FATA
Urban
DHQs
DHQs
Semi-Urban Rural
Number
Proportion
branches
branches
Number
Proportion
as a
as a
Total
proportion
proportion
of urban
of urban
NWFP
538
63.5%
368
68.4%
309
36.5%
847
Peshawar
140
87.5%
136
97.1%
20
12.5%
160
Mardan
44
62.9%
24
54.5%
26
37.1%
70
Mansehra
38
62.3%
11
28.9%
23
37.7%
61
Kohat
35
52.2%
19
54.3%
32
47.8%
67
Swat
32
44.4%
21
65.6%
40
55.6%
72
Abbotabad
29
42.6%
19
65.5%
39
57.4%
68
Haripur
26
66.7%
15
57.7%
13
33.3%
39
Nowshera
25
73.5%
12
48.0%
9
26.5%
34
Charsadda
23
85.2%
8
34.8%
4
14.8%
27
D.I. Khan
21
70.0%
21
100.0%
9
30.0%
30
Malakand
19
82.6%
6
31.6%
4
17.4%
23
Swabi
19
42.2%
6
31.6%
26
57.8%
45
Bannu
17
63.0%
13
76.5%
10
37.0%
27
Chitral
15
78.9%
10
66.7%
4
21.1%
19
Tank
12
100.0%
10
83.3%
12
Lower Dir
9
37.5%
6
66.7%
15
62.5%
24
Hangu
8
100.0%
8
100.0%
8
Karak
6
26.1%
5
83.3%
17
73.9%
23
Upper Dir
6
46.2%
6
100.0%
7
53.8%
13
Buner
4
40.0%
2
50.0%
6
60.0%
10
Shangla
4
80.0%
4
100.0%
1
20.0%
5
Lakki Marwat
3
60.0%
3
100.0%
2
40.0%
5
Kohistan
2
50.0%
2
100.0%
2
50.0%
4
Batgram
1
100.0%
100.0%
1
Tribal Areas
38
76.0%
27
71.1%
12
24.0%
50
Kurram Agency
13
81.3%
7
53.8%
3
18.8%
16
Khyber Agency
9
90.0%
5
55.6%
1
10.0%
10
N. Wazirastan Agency
6
85.7%
5
83.3%
1
14.3%
7
Bajaur Agency
5
62.5%
5
100.0%
3
37.5%
8
Mohmand Agency
2
66.7%
2
100.0%
1
33.3%
3
Malakand Agency
1
33.3%
1
100.0%
2
66.7%
3
Orakzai Agency
1
50.0%
1
100.0%
1
50.0%
2
S. Wazirastan Agency
1
100.0%
1
100.0%
0.0%
1
Total
576
64.2%
395
68.6%
321
35.8%
897
Source: SBP (2003)

21
among these banks is quite intense and cost of intermediation has fallen sharply in recent years. These privatized banks and the newly scheduled private banks have a large outreach. Public sector banks consist of four commercial banks, NBP, FWB, BOK and BOP, and two specialized banks ZTBL and IDBP. The only provincial cooperative bank was closed a few years back.
Bank interest rates have fallen sharply in recent years. Besides increased competition, the fall in interest rates in the post 9/11 years was largely due to influx of foreign remittances (average of over $4b for five years) and inflow of foreign aid and the consequent low government borrowing. Huge sums of money have been disinvested from NSSs since their profit rates were slashed, which were transferred to banks and other FIs. Thus average lending rate of commercial banks fell from 13.6% p.a. in June 2001 to 7.28% p.a. in June 2004 while the corresponding average deposit rate fell from 5.27% p.a. to 0.95% p.a.
On the other hand, transaction costs have increased with new regulatory requirements of equity/liquidity, management/governance structures, credit assessment, and transparency and reporting requirements. Documentation needs have thus increased both on deposits and advances sides. Reporting of financial transactions has increased. All transactions above a threshold are reported to SBP. Details of borrowers of amounts equal to or more than Rs. 500,000 are reported to the CIB/SBP, who check for default and advise back. A private firm, DataCheck based in Karachi, provides similar services to FIs on smaller loans of consumer finance. Some banks have, consequently, impose certain requirements and set their tariffs too high (i.e. the minimum level of deposits, monthly service charge, check cost, remittance and other transaction costs, etc.).
Among the specialized banks, ZTBL appear to have an elaborate network of branches and regional offices to serve in rural areas, offering production and capital loans for tractors, machinery, etc. for agriculture and general loans under its schemes of rural credit and micro credit. It primarily lends by using the credit lines from SBP; hence its deposit base is very small. The Bank faces a serious problem of stuck up loans, and is required to implement stricter prudential regulations. Hence lending for development category has shrunk to about 20% of its portolio, which is being attributed to the PR requirement of deposit of registration documents of tractors with ZTBL. The ZTBL has good outreach in rural areas through its mobile credit officers who render investment advice besides the usual credit supervision. The outreach of IDBP is limited to four branches with shrinking level of operations.
The cooperative finance has failed in NWFP, although there is a large number of cooperative societies (8,434 in total, of which 8,127 are agricultural). The Provincial Cooperative Bank, established in 1995, is in the process of liquidation since 2001, and an amount of Rs 300 million is stuck in outstanding loans, of which about one third is the accrued interest. Since the Cooperative Bank loans were cheaper than the ZTBL loans, efforts are being made to revive the Bank. But there are many problems. Loan recovery is low because of the withdrawal of certain powers from banks and politically motivated

22
policy pronouncements; local traditions hinders sale of mortgaged property to recover loans; and writ of the government has weakened overtime.
Banks are, as reported earlier, now expanding their branches in NWFP under the influence of the stated policy of the SBP which aims to close/merge the banks at the smaller end. Automated and electronic means of financial transactions are also gradually expanding. Although the number of credit, debit and ATM cards has grown sharply, the value of transactions through these means is still very limited.
Muslim Commercial Bank in NWFP3—a Case Study
Muslim Commercial Bank (MCB) is the first privatized bank in Pakistan. Currently it has 942 branches in Pakistan; 57 percent in Punjab, 21 percent in Sindh, 19 percent in NWFP, and 3 percent in Balochistan.
This bank has branch network in 22 out of 24 districts of NWFP. At present 104 branches are working in this province with a staff strength of 792. Business concentration, physical infrastructure, and competitors’ behaviour are the important factors for MCB to open a branch.
MCB offers services related to deposits, ATMs, money transfer, handling of utility, imports and exports bills, lending services, sale and purchase of government securities and so on.
Deposit Services
In 2004, 8.8 percent of total accounts of MCB were in NWFP that keep the amount of Rs 363,575 million that is 9.3 percent of total deposit amount of this bank in Pakistan. During 2001-04, the number of accounts has declined from 404 thousand to 364 thousand in NWFP. This decline is mainly because of decline in the number of PLS and fixed accounts. However, total amount in deposits has increased at a rate of 5 percent per annum. Highest growth rate was observed in the amount in current accounts followed by PLS accounts. Amount in fixed deposits has declined by 13 percent per annum. This indicates a shift from interest earning deposits to non-interest earning deposits. This is due to drastic decline in the rate of profits and loss on PLS accounts and average mark up rate on fixed deposits. The rate of profit and loss has declined from 4.48 percent to 0.85 percent during 2001 to 2004. And the average mark-up rate on fixed deposits has declined from 9.06 percent to 1.77 during this period [see table 4.2].
3 We are grateful of Mr. Imtiaz Ahmad, General Manger, Peshawar for providing the information on the services of MCB in NWFP.

23
Table 4.2: Deposit Services of MCB in NWFP
2001
2002
2003
2004
Growth rate
(2001-04) (%)
# of Total Deposits
404,185
398,963
374,554
363,575
-2.6
Amount (Rs million)
16,835
18,314
20,101
20,499
5.0
Average rate of profit/loss on PLS accounts (%)
4.48
3.14
1.18
0.85
-34.0
Average rate of return on fixed deposits (%)
9.06
7.32
3.12
1.77
-33.5
# of accounts
Current deposits as % of total deposits
12.84
14.93
17.41
19.97
8.8
PLS deposits as % of total deposits
79.02
79.26
77.75
76.10
-3.5
Fixed deposits as % of total deposits
4.81
4.13
3.32
2.62
-16.3
Amount
19.40
20.02
24.18
28.58
15.7
50.42
53.13
54.60
55.65
7.7
22.54
20.52
16.09
10.61
-13.0
Source: Based on the data provided by the MCB, Peshawar
Muslim Commercial Bank maintains four types of foreign currency accounts. These are foreign currency current accounts, foreign currency savings accounts, foreign currency term deposits and dollar khushali bachat accounts. In NWFP, the number of foreign currency accounts increased from 3,717 to 4,092 from 2001 to 2002 and then declined to 3,987 in 2004. Similar trend has been noted in the amount in these accounts. This amount is 10 percent of total amount in foreign currency accounts in MCB in Pakistan.
ATM Services
MCB has a large network of ATM service, covers 30 cities with 197 ATM locations. MCB charges Rs 250 to obtain an ATM classic card and Rs 350 to obtain a gold ATM card. MCB ATM is functional at 217 locations in Pakistan. Out of this, 11 are in NWFP. Regular ATM card allows the maximum withdrawl of Rs 10,000 per day with maximum 3 transactions. MCB ATM gold card allows a maximum limit of Rs 25,000 with a maximum 6 and minimum 2 withdrawls. MCB ATM can also be used outside Pakistan and allows a maximum limit of equivalent to US$ 200 per day. These are also classic and gold ATM cards. Fee of obtaining these cards is Rs 400 and 500 respectively. A minimum balance of Rs. 1000 is to be kept in reserve. US$ 3 or 2.75 percent of cash withdrawl is charged on international transactions and $ 1 on balance statement. ATM card holders can also avail the service of mobile banking without any additional charges.
Debit and Credit Card Services
The ATM card can be used as debit card and allows 15 purchase transactions per day.

24
Currently, this card can be used at 400 locations in Karachi only. MCB Master Card was introduced in 1995. This card can be used at 3,000 outlets in Pakistan and over 15 million outlets in 232 countries. One time joining fee for MCB Master Card for the use in Pakistan and for international use is Rs 1,000. Annual fee for the card used in Pakistan is Rs 1,000 and that for international use is Rs 1,500. joing fee for MCB Master Gold Card is Rs 2,000 and its annual fee is Rs 4,000. Late payment service charges are 4 percent or Rs.100 (whichever is higher) after due date of payment. Card replacement fee in case of loss is Rs.250. Cheque return charges are Rs. 250. Domestic disputes handling charges are Rs.300 per dispute + financial cost (if charge not resolved in favour of cardholder). International dispute handling charges are Rs.500 per dispute + financial cost (if charge not resolved in favour of cardholder).
Fund Transfer Services
MCB provides domestic as well as international fund transfer services to its customers. Domestic transfers take one day and three days are required for international transfers. Domestic funds received in NWFP has declined by 3 percent per annum during 2001- 2004. However, domestic funds sent from NWFP grew at an annual rate of 13 percent during the same period. International funds received in NWFP grew at higher rate (20%) than the funds sent (5%) from NWFP during this period [see table 4.3]. The service charges on domestic fund transfer are higher than that on international fund transfers. For example, MCB charges 0.10 percent of the amount as fee on domestic transfers and 0.01 percent on international transfers.
Table 4.3: Fund Transfer Services of MCB in NWFP
2001
2002
2003
2004
Growth rate (2001- 04) (%)
Domestic Funds
Funds received in NWFP (million Rs)
88,484
91,682
95,627
78,898
-3
Funds sent from NWFP (million Rs)
52,031
68,787
87,429
83,509
13
Amount earned as fee of domestic fund transfers (000 Rs)
71
65
65
70
International Funds
Funds received in NWFP (million Rs)
2,358
2,321
3,843
4,908
20
Funds sent from NWFP (million Rs)
2,985
3,147
3,270
3,603
5
Amount earned as fee of international fund transfer (000 Rs)
1.00
1.02
1.44
1.77
Service charges vary according to the mode used to transfer money. For example, minimum Rs 50 are charged on a pay order from account holders and Rs 100 from non- account holders. Students are charged Rs 25 per pay order for the payment of fee favouring any educational institution. Charges on the issuance of duplicate pay order are Rs 100 from account holders and Rs 150 from non-account holders.

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Service charges on bank draft vary with amount. For example, these are 0.10 percent, 0.05 percent and 0.04 percent for the amounts up to Rs. 100,000, Rs 1,000,000, and Rs 10,000,000, respectively. On the issuance of duplicate drafts, bank charges Rs 200 from account holders and Rs 250 from non-account holders. Charges of inter-branch fund transfers through MT,TT,FAX-PRESS are 0.10 percent with minimum Rs.100.
In case of telegraphic transfer of money Rs. 3 plus cost of money order or telegram are charged. No money is charged on money order or telegram if funds are remitted to branch of the same bank.
In case of Inward Foreign Draft, bank charges 0.15 of the amount with minimum charges Rs.200.
Inward cheques expressed in foreign currency for payment in Pak Rupees after conversion at authorized dealers buying TT clean rates, bank charges 0.15 percent as commission with minimum charges Rs.200.
In addition to above, commission / service charges / recovery of courier /postage/ telex/fax/cable charges should also be made according to prescribed tariff (wherever applicable).
On international (outward) remittances from foreign currency accounts, bank charges a minimum of US$ 5 per item up to the value of Rs 10,000 or its equivalent. Or a flat rate of 0.01 percent per item for value of over Rs 10,000 or its equivalent is applied with minimum US$ 8 and maximum US$ 75.
Depositing of foreign currency notes in foreign currency account involves a charge of 0.50 percent upfront with maximum limit of Rs 400.
Charges on inward collection of foreign currency from abroad are US$ 1 per US$ 1,000 subject to minimum US$ 3 and maximum US$ 6.
Charges may be waived by the General Manager if the customer maintains average balance of Rs 1.0 million in current account or US$ 0.05 million in foreign currency current account.
Travelers cheques expressed in foreign currency are also a mode of money transfer. Bank charges 1 percent of the amount of travelers cheques sold with minimum charges of Rs 200. Charges on the rupee travelers cheques are Rs 5 per piece.
Bill Handling Services

26
MCB handles utility, imports and exports bills. The amount handled under the head of utility bills has increased by 18 percent per year during 2001 to 2004. During this period export and import bills have grown at annual rates of 21 and 24 percent respectively.
Lending Services
The amount disbursed by the MCB in NWFP is about 5 percent of the total amount disbursed in Pakistan by this bank. However, a considerable progress in the number and amount of loans disbursed by MCB in NWFP has been observed. The number of borrowers has increased from 4,070 to 5,852 during 2001-2004. A significant progress in the number of female borrowers has been noted. Out of these 30 percent were from rural areas in 2004. This proportion was only 16 percent in 2001. Most of the females borrowed for consumption purposes. Nearly 60 percent loans were consumption loans that’s females borrowed in 2004. About 64 percent loans were disbursed in urban areas in 2001. This proportion declined to 44 percent in 2004. This indicates more loans are now going to rural areas. However, amount of loans disbursed in urban areas is much larger than that is disbursed in rural areas. Yet the amount disbursed in rural areas has grown at much higher rate (13%) than the amount that was disbursed in urban areas (6%). MCB disburses agricultural, corporate loans, SME, and consumption loans. Annual mark-up rate differs according to the type of loan. In 2004, highest mark-ip rate was for agricultural loans (12%), followed by SME loans (11%). Consumption loans were disbursed at a rate of 3 percent in 2004. No change has been observed in the mark-up rate of agricultural and consumption loans. However, a decline in this rate on corporate and SME loans is noted. Most of the loans are disbursed for less than one year period. But the amount of most of the loans is more than Rs. 100,000. The amount of loans of more than one-year period is growing at an annual rate of 32 percent. This growth is found 5 percent for the amount of short-term loans.
Average size of loan in NWFP remained in the range of Rs 600,000 to 700,000 during 2001-2004. An average loan of more than Rs 100,000 is of more than Rs 700,000. Loans of more than Rs 100,000 are few in number and the average size of such loans is not more than Rs. 70,000 [see table 4.4].
Table 4.4: Lending Services of MCB in NWFP
2001
2002
2003
2004
# of loans in NWFP as % loans in Pakistan
8.52
10.14
8.03
9.02
Number of loans
Short term loans as % total loans in NWFP
68.14
67.96
67.97
73.81
Long term loans as % total loans in NWFP
31.86
32.04
32.03
26.19
Loans up to Rs 100,000 as % of total loans in NWFP
11.27
11.16
11.22
10.39
Loans more than 100,000 as % of total loans in NWFP
88.73
88.84
88.78
89.61
Urban loans as % of total loans in NWFP
63.79
64.42
45.48
43.65
Rural loans as % of total loans in NWFP
36.21
35.58
54.52
56.35
Amount of loans in NWFP as % Pakistan
5.56
5.71
4.58
4.42
Amount of loans
Short term loans as % total loans in NWFP
94.92
92.88
89.33
88.23

27
Long term loans as % total loans in NWFP
5.08
7.12
10.67
11.77
Loans up to Rs 100,000 as % of total loans in NWFP
1.09
0.98
1.08
1.04
Loans more than 100,000 as % of total loans in NWFP
98.91
99.02
98.92
98.96
Urban loans as % of total loans in NWFP
85.63
84.67
81.40
82.36
Rural loans as % of total loans in NWFP
14.37
15.33
18.60
17.64
Average annual markup rate (%)
9
8
8
8
Average size of loans
Average size of loan (Rs)
689,059
680,322
727,787
656,622
Average size of short-term loans (Rs)
959,919
929,718
956,505
784,885
Average size of long-term loans (Rs)
109,881
151,236
242,505
295,103
Average size of loan up to 100,000 (Rs)
66,899
59,651
70,158
65,510
Average size of loans more than 100,000 (Rs)
768,053
758,277
810,858
725,142
Recovery rate in NWFP (%)
96
98
97
98
Average annual mark-up rate has declined from 9 percent in 2001 to 8 percent in 2004. The recovery rate shows an improvement from 96 percent in 2001 to 98 percent in 2004.
A loan application can be submitted in any of the branch of MCB. However, application is processed at regional office. Real estate is the most common collateral. Bank secures 96 percent of loan through collateral. It takes 8 days to process a loan application. Most important factors in making decision about a loan application are income/employment history of loan applicant followed by collateral. A loan application can be rejected if an applicant possess unsatisfactory cash flow, inadequate collateral or bad credit history. Service charges are levied to process a loan application. On easy personal loans, bank charges 1 percent of the loan amount as fee. Fee to process an application for house finance is Rs 5,000 and for Auto loan is Rs 3,500. These fees are non-refundable.
Fee Structure of MCB on Regular Services
 Bank charges on the issuance of duplicate or photostat copy of the bank statement are Rs.50 per statement
 Charges on issuance of fresh bank statement of account other than 1/2 yearly statement are Rs.50
 Charges on the issuance of loose (counter) cheque are Rs.50 per cheque for local currency account and US$ 1 for Foreign Currency Account.
 Charges on the issuance of Cheque Book are Rs.3 per leaf plus excise duty.
 Charges on the issuance of new cheque book in lieu of lost cheque book are Rs.100 per request plus excise duty.
 Stop payment charges per instruction are Rs.150 for local currency account and US$ 3 for foreign currency account and foreign currency cheques/drafts.
 Account closing processing cost for local currency accounts is Rs.250 or the entire amount if balance is below Rs.250. This amount for foreign currency account (other than the frozen accounts) is US$5 or the entire amount if balance is below US$ 5.

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 Charges on account maintenance/service charges are Rs.50 per month on minimum monthly average balance of Rs.10,000 or below in all PLS savings and current deposit accounts.
 Account maintenance charges on foreign currency accounts having balance less than US$100 are US$ 2 per month
 Merchant service charges at merchant location on cash up to Rs 3,000 on Debit Card are Rs 25 per transaction and up to Rs 5,000 are Rs 50 per transaction.
 Cash on Debit Card through POS ( at Branch location) Up to Rs.5,000 are Rs.50 per transaction, from Rs.5,001 to Rs.10,000 are Rs.100 per transaction, and from Rs.10,001 to Rs.25,000 are Rs.200 per transaction.
 Charges on cross branch transaction are as follows
Current account
PLS account
Up to Rs 500,000
Rs 100
Rs 50
Rs 500,001 to Rs 1,000,000
Rs 200
Rs 100
Rs 1,000,001 and above
Rs 400
Rs 200
 Dispute Handling Charges on domestic sales transaction dispute for debit cards are Rs.150 (flat) per dispute contested. International Sales Transaction dispute for debit cards are Rs.250 (flat) per dispute contested.
 Charges for the request of Cheque Book through Smart Card are Rs.25 per request. Customer is informed through a post card that involves postage charges.
 Charges for the request of Statement of Account through Smart Card are Rs. 25 per request. Customer has to collect this statement from home branch.
 Transaction made on other Bank’s ATMs Overseas and in Pakistan Charges 2.75% or US$ 3 per transaction (whichever is higher).
 Balance Enquiry on other Bank’s ATMs Charges equal to US$ 1 per transaction.
 Charges of balance inquiry are Rs. 2 per transaction.
 Charges of Mini Statement are Rs. 5 per transaction.
 Internal Funds Transfer through Smart Card from customer's one account to another account for a maximum amount of Rs. 20,000 are up to Rs. 20 per transaction.
 Charges of utility bills payment through Smart Card are up to Rs. 15 per transaction.
 Charges of mobile phone bill payment through Smart Card are up to Rs. 17 per transaction.
 Charges of MCB 1-link switch transactions are up to Rs. 15 per transaction.
 Charges of balance inquiry through mobile SMS are Rs. 2 per transaction
 Charges of mini statement through mobile SMS are Rs. 5 per transaction
 Charges of bill Payment through mobile SMS are Rs. 17 per transaction
The prospects of MCB are expected to be bright in future, especially in view of recent trade liberalization and stability and peace in Afghanistan. However, lack of industrialization, lack of technical know-how and insufficient infrastructure are identified

29
Soneri Bank in NWFP – a Case Study
Soneri Bank is incorporated as a private commercial bank since September 28, 1991. The first branch was opened in Lahore in April, 1992 followed by Karachi Branch in May, 1992. The bank now operates with 52 branches spread all over Pakistan. Two branches of Soneri Bank are functioning in NWFP. Both these branches are in Peshawar. The main branch, Peshawar was established in 1992 and Chowk Yadgar branch started its functions in 2002. Business concentration, population, and government encouragements are the important factors reported by the Soneri Bank for its opening of the new branch.
Soneri Bank offers services relating to deposits, ATMs, money transfers, handling of import and export bills, lending services, sale and purchase of government securities and other standard banking functions.
Deposit Services
In 2004, over 3 percent of the total number of accounts of Soneri Bank were in NWFP. The total deposits in these accounts were Rs 510 million which is 1.4 percent of the total deposits held by this bank throughout Pakistan. During 2001/04, the number and amount of total deposits in NWFP increased by 5.6 and 4.6 percent per annum respectively. However, a significant decline in the number and amount of PLS account and a marginal decline in the number and amount of fixed deposits has been observed during this period. This period witnessed a decline in the average rate of profit and average rate of return on fixed deposits. The profit rate declined from 9.5 percent to 2 percent and the rate of return on fixed deposits declined from 11 percent to 3 percent during this period [see table 4.5].
Table 4.5: Deposit Services of Soneri Bank in NWFP
2001
2002
2003
2004
Number of Total Deposits
5,911
6,495
6,905
7,348
Amount (Rs million)
426
510
337
510
Average rate of profit/loss on PLS accounts (%)
9.5
9.0
4.5
2.0
Average rate of return on fixed deposits (%)
11.0
10.0
3.0
3.0
Number of accounts
30.67
31.78
33.74
40.46
50.58
50.02
48.57
46.38
1.32
1.29
0.84
1.06
Amount
10.15
36.09
34.03
32.08
64.93
42.43
54.09
48.40
19.25
15.70
11.78
19.46
Source: Based on the data provided by the Main Branch, Soneri Bank, Peshawar
Soneri Bank also maintains foreign currency accounts. In NWFP, the number of foreign currency accounts increased from 1,108 to 1,266 during 2001 to 2004. However, a decline in the amount in these accounts from US$ 1.334 million to US$ 1.030 million was observed during this period.
ATM Services

30
Soneri Bank ATM Card can be obtained by maintaining a Rupee Savings or Current Account with any of the on-line branches. A fee of Rs. 200 is charged to obtain an ATM card. In NWFP, there is no ATM network of Soneri Bank, however, cash withdrawal and balance inquiry facility is available at any ATM machine of the 1-link member banks in NWFP. Services charges on using the ATM of any other bank are Rs. 15 per transaction4. This amount is charged by the bank whose ATM machine is used. Per day limit of withdrawal on ATM card is Rs. 20,000.
Fund Transfer Services
Soneri bank provides domestic as well as international fund transfer services to its customers. Domestic transfers can be received the same day when they are sent. International transfers take one working day to reach at their destination. An increase in the domestic transfers and a decline in the international transfers through Soneri bank has been observed during 2001/2004 period. However, domestic funds sent have grown at higher rate (13.6%) than that are received (12.2%). Similar trend has been found in international transfers. Soneri bank charges 0.25% to 0.055% of the amount as fee on domestic transfers. On pay orders, bank charges Rs 25 per pay order. These charges on per bank draft are 2.25% to 0.055 percent. Fee of international transfers is a maximum of US$ 28. Funds transfer data is given in Table 4.6
Table 4.6: Fund Transfer Services of Soneri Bank in NWFP
Funds Transferred (Rs million)
2001
2002
2003
2004
Compound growth rate (2001-04) (%)
Domestic funds received in NWFP
5,897
6,948
7,838
9,366
12.26
Domestic funds sent from NWFP
5,994
6,732
8,754
9,973
13.57
International funds received in NWFP
2,621
1,675
3,543
474
-34.79
International funds sent from NWFP
2,414
1,992
480
315
-39.90
Bill Handling Services
Soneri Bank does not deal in utility bill handling. However, it provides the services of import and export bill handling. During the period of 2001/04, export bill handling by this bank has declined from Rs. 668 million to Rs. 500 million. On the other hand, the import bill handling has increased from Rs 41 million to Rs 186 million during the same period.
Lending Services
The amount disbursed in different lendings by the Soneri bank in NWFP is less than 1 percent of the total amount disbursed in Pakistan by this bank. However, a considerable progress in the number and amount of loans disbursed by Soneri bank in NWFP has been
4 This is a reciprocal charge with the Soneri Bank Charging Rs 15 if the ATM card of any other bank is used on the machine of Soneri bank’s ATM machine.

31
observed because of the small base from which it started. All of the loans are disbursed in urban areas. Most of the loans are either SME loans or consumption loans. However, in 2002 and 2003 the bank disbursed a few agricultural loans also. On the average, one borrower borrows more than one (1.05) loan in a given year. There was no female borrower in 2001. The females borrowing started in 2002 and now the total of female borrowers is 5 [see table 4.7]. The amount of loans has also increased from Rs 36.7 million to Rs 127 million during 2001/04.
Table 4.7: Lending Services of Soneri bank in NWFP
.
It is interesting to note that most of the loans were short-term (less than a year) up to 2003. However, in 2004, the number of long-term loans was higher than the short-term loans. The total amount of long-term loans was, however, less than the amount of short term loans in that year. The average size of short-term loans was Rs 1.87 million whereas the average size of long-term loans was only Rs 257,205. Average annual mark-up rate was the same for both types of loans. This rate declined from 18 percent in 2001 to 9 percent in 2004. This bank reported a recovery rate of more than 99 percent.
The Bank secures 85 percent of its loan through collateral. Most important factor in making decision about a loan application is the credit history of loan applicant followed by income/employment history and purpose of loan. A loan application can be rejected if of the first two criteria are not adequately met.
The Bank of Khyber
The Bank of Khyber was established in 1991 as a commercial bank. It is principally engaged in the business of commercial, investment and development banking. By the end
2001
2002
2003
2004
Compound growth rate (2001- 04) (%)
Total Loans
Number of loans in NWFP
45
60
86
131
30.62
Number of borrowers in NWFP
42
58
83
123
30.82
Number of females borrowers in NWFP
0
2
3
5
Amount of loan in NWFP (Rs million)
36.7
60.1
74.4
127.0
36.38
Average annual markup rate(%)
18
14
12
9
-15.91
Loans up to 1 year
39
41
40
58
10.43
36
39
37
50
8.56
0
0
1
2
33.5
52.3
59.9
108.2
34.08
Loans more than 1 year
6
19
46
73
86.76
6
19
46
73
86.76
0
2
2
3
3.2
7.8
14.5
18.8
55.39

32
of 2003, there were 29 branches of this bank. Out of which 23 were located in NWFP and 6 in major cities of Pakistan outside NWFP. Deposits of this bank increased from Rs 9,630 million in 1998 to Rs 16,659 million by the end of June 2004. Bank of Khyber launched its micro business development program in 1997 through a credit line from Asian Development Bank (ADB). BOK started its lending under Barani Area Development Project (BADP-I) followed by Dir Area Support Program (DASP) and Malakand Rural Development Project (MRDP). Bank has extended loans through third party linkages. In this regard, NGOs and RSPs played a crucial role in the process of social mobilization at grass root level. Bank of Khyber provided individual loans for micro entrepreneurs as well as extended group lending. By the end of June 2004, BOK had disbursed loans worth Rs 924.6 million to 19,745 borrowers. Average size of loan was Rs 28,332.
By the end of February 2005, there were 15,949 loans that were up to Rs 100,000 and 1,818 bigger than that. The total amount disbursed was Rs 1,027 million. Of the total, 9,462 loans amounting Rs 598 million were adjusted loans.
Case Study of the Bank of Khyber Timergara Branch
The Timergrara branch of BOK was established in 1997. Since 1999, the number and amount of active loans increased at an annual rate of 42 percent and 20 percent, respectively. Average loan size declined from Rs 11,172 in 1999 to Rs 4,268 in 2004. The amount of loan outstanding has doubled in 2004 relative to 1999 [see table 4.8]. The poor performance of loan recovery can be seen through increasing number and amount of delinquent loans with past over due of 30 days and classified loans with past over dues by 90 days and above. At present, delinquent loans are 51 percent of the active loans. This proportion was 24 percent in 1999. The number of classified loans has increased sharply during this period (at an average annual rate of 95%). Currently such loans are 31 percent of the total active loans.

33
Table 4.8: Lending by the Bank of Khyber, Timergara Branch
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Jul-04
Compound growth rate (1999-04) (%)
Number of loans
58
196
387
390
473
470
41.72
Number of clients
85
233
403
400
484
481
33.49
Loans disbursed (Rs 000)
6,480
16,008
24,335
22,280
21,291
20,058
20.72
Average loan size (Rs)
11,172
8,168
6,288
5,713
4,501
4,268
Loans outstanding (Rs 000)
5,565
12,117
15,552
12,056
12,417
10,825
11.73
Number of delinquent loans
14
31
114
195
210
239
60.46
Total overdue in delinquent loans (Rs 000)
146
488
1,615
2,628
2,947
3,685
71.20
Delinquent loans as % of active loans
24%
16%
29%
50%
44%
51%
Number of classified loans
2
11
28
58
98
146
104.43
Total outstanding in classified loans (Rs 000)
71
902
1,533
2,285
2,699
3,959
95.54
Classified Loans as % of active loans
3%
6%
7%
15%
21%
31%
Outstanding loans at Risk
1%
7%
10%
19%
22%
37%
Source: Based on the data provided by the Bank of Khyber, Timergara Branch
Issues and Concerns
A broad analysis of institutional, inter-temporal and spatial aspects of the evolution of access to financial services, based largely on the available data and interactions with FI’s managers reveals the following key points:
 Scheduled banks remain the main providers of financial services in NWFP, and in terms of bank branches, the province is below the national level but better served than the province of Balochistan.
 The aggregate supply of financial services appears to have increased over the past years despite the contractions in the number of scheduled banks due to mergers and closure of loss making bank branches.
 There has been a significant shift in composition of service providers. With privatization of banks, the share of private banks has risen sharply in terms of institutional presence as well as the volume of business.
 In line with the national trends, banks are expanding their outreach by issuing new instruments and technologies like automobile, housing and other consumer finance, ATMs, credit/debit cards, etc.
 Newly chartered private banks have expanded their outreach very fast by opening branches, issuing new financial instruments and using modern technologies, such

34
as ATMs, credit/debit cards, Islamic modes of banking, etc. However despite this expansion, the share of these banks in terms of presence or volume of business appears very small.
 Banks tend to serve the relatively rich people. For all banks taken together, per capita income tends to be positively associated with broad measures of access such as density of banking institutions or the volume of loan and deposit services they provide.
 Most of the bank branches are located in Peshawar and central part of NWFP. The institutional presence in the southern and northern districts is very limited. These regional differences would further accentuate as the loss making branches of privatized banks are likely to be closed.
 Regulatory practices of “know your client”, verification of credit records from CIB/DataCheck, insurance requirements, reporting requirements and other documentation, as is felt by the stakeholders, have infringed upon privacy, added to cost of business and restricted access. Some of these practices need to be reviewed to create a better balance between business interests and the related risks.
 Some contrasts among the banks are noteworthy. Private and public sector banks are similar in many respects; both tend to serve richer people and areas; both have urban bias; and easily substitute each other in thinly populated areas. However, the new private banks tend to chose better technology and have higher tariff structure, while public banks including the privatized banks have lower tariffs and better serve the poor.
 Agricultural community appears to be inadequately served. Timely availability of credit and other inputs are major problems of the agriculture sector in the NWFP. Despite the recent increases in lending to agriculture, the lending level is much lower (almost one fifth) of the needed/desired level assessed by the stakeholders. Agriculture has also not received much attention from the GoNWFP; the package of agricultural credit by the BOK is yet to be decided. There are several reasons for the low level of lending to the agriculture sector. Some of these are:
o Population is conservative in their outlook and with a religious background unwilling to accept interest related loans. Replacing interest with service charges may be an option.
o ZTBL and other commercial bank lending appear to favor larger land holdings.
o One window operation of ZTBL is not effective in the NWFP as officials of the Revenue Dept do not cooperate. Malpractices by ZTBL officials also been alleged. Passbook remains a big problem for the farmers. Lengthy and complicated procedures discourage farmers from seeking loans. Allocation of loans in the NWFP is higher but disbursement much smaller.
o Farmers have very low capacity to purchase inputs; prices of inputs have risen relative to output prices over the past 20 years. Absentee landlords do not provide inputs to the tenant on time.
o Several factors have adversely affected the viability and credit off-take for agriculture. Crop prices relative to input prices have fallen. Poor

35
infrastructure increases the transaction costs of inputs and outputs and impacts on the quality of the produce. There is no seed industry in the province. Orchards are primarily owned by landlords/ Khans, and tenant works in the orchard as a worker and do not share the income/production from the orchard.
o Similarly credit needs of non-agricultural rural segments appear to remain underserved.
 There have been some expansions of new service delivery points, and growth of some institutions, including the new private banks, insurance companies, leasing companies, a modarba and MFIs. However, NBFIs have yet not penetrated far and their share appears very small.

36
Chapter 5
Non Bank Financial Institutions (NBFIs)
A variety of institutions operate in this sector, catering for about 6-7 percent of the total financing needs of the country as a whole. NBFIs are similar to banks since they mobilize savings and lend/invest these savings on opportune places. NBFIs mostly generate resources from equity, longer term certificates of investment/deposit, TFCs and bank borrowing, while banks mostly rely on deposits, often subject to call. On the uses side, NBFIs lend money to big clients and invest in loans for plant and machinery, vehicles, while banks mostly do the commercial lending, i.e. the basic difference is in maturity. The fundamental difference is on maturities; NBFIs deal in longer term maturities than banks, both on resources and uses sides. This configuration is not water tight despite statutory requirements, and there have been movements in both directions; banks have entered in areas of business originally reserved for NBFI, while some NBFIs graduated to become commercial banks.
Within NBFIs, there is a whole spectrum of institutions serving various market segments in NWFP through their niche-specific specialized services and instruments. NBFIs have traditionally been categorized into 8 groups, according to their main business focus. Important groups are DFIs, mutual funds, leasing companies, development banks, modarbas, housing finance companies, discount houses and venture capital companies. All NBFCs are regulated by the SECP, except DFIs which are regulated by the SBP.
Eight DFIs lead the sector in terms of their assets size; of these six are joint ventures, one is a financial supermarket and one SME Bank to cater to the financial needs of SMEs. The asset portfolio of the joint ventures has gradually shifted from advances to investments in PIBs and stock market shares during the past several years. Within this group, the SME Bank has opened a branch in Peshawar. This branch is still grappling with left-over accounts of its predecessor institutions (SBFC, YIPS and RDFC) and not begun new operations.
Mutual funds lower the investment risk diversification for small investors and add liquidity to the stock market. Mutual funds were introduced with the establishment of NIT and ICP in the public sector, which enjoyed a monopoly status for quite some time. More recently, the mutual fund sector has been opened to the private sector. A number of private sector mutual funds, both open-end and close-end, have been established. Mutual funds have been doing a roaring business in recent years with boom in the stock market. Of the 30 mutual funds, the leading ones are NIT, UTP and related funds, PSF, PIF, UMF, MSF series and Daood MMF. In NWFP, the access to most of the mutual funds is indirect through stock brokers except for NIT which has branch operations in Peshawar and Abbotabad.
Leasing companies initially focused on meeting the finance needs for the leases of plants, machinery, vehicles, etc of the corporate sector. However, given the slow economic growth and general slump conditions, this focus shifted to SMEs, agriculture and consumer finance. The main sources of funds are equity and COIs. In more recent

Access to Finance in NWFP

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