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Editor’snote
04 / Banking Review 2013
The publication of Business Recorder’s
Banking Review 2013 has interestingly
coincided with the release of State Bank
of Pakistan’s latest quarterly review of the
country’s economy that covers the period
July-September 2013. A fresh central
bank outlook, therefore, has thrown up an
opportunity for us to make a brief
comment on the banking sector in a more
cogent and meaningful manner. While
defending its decision of a hike policy in
rate by 50 basis points to 9.5 percent in
September 2013, SBP has argued that
policy tightening had become imperative
although monetary growth was already
subdued as the growth in broad money
supply (M2) during Q1-FY14 was only 0.2
percent, compared to 0.7 percent in the
corresponding quarter last year. “[T]his
trend can primarily be traced to a rise in
the external deficit, which reduced the
NFA of the banking system by 64.4
percent during the period,” according to
SBP. The SBP report, through a footnote,
explains that in absolute terms, “the NFA
of the banking system declined by Rs
173.2 billion in Q1-FY14, compared to an
increase of Rs 11.8 billion in Q1-FY13”.
Explaining why NDA, on the other hand,
posted an increase of 2.3 percent during
the quarter, the central bank holds high
budgetary borrowing from the banking
system and lower net retirement of
private sector credit responsible for the
rise. Through another footnote or an
additional piece of information printed at
the bottom of the page, the bank argues
why its decisions on interest rates are not
based on the previous data, but on the
forecast of macroeconomic variables. The
SBP report, indeed, gives one a bigger
picture of the country’s financial domain.
Having said that, one however needs to
admit the fact that a lot of water has flown
under the bridges since September 2013
and the present shape of macroeconomic
indicators amply explain why central bank
policies are sometimes not truly forward-
looking or perhaps, do not genuinely
provide for the future.
That our active financial institutions
deliver significant and unique value to
the country’s economy and businesses,
investors, and savers is a fact that has
found its best expression in the perfor-
mance of our banking sector particularly
since 2000. However, there exists a
flawed, albeit widely popular, argument
that well developed financial markets are
correlated with economic development
and that a sound and sophisticated
financial system promotes the efficiency
of investment and economic growth in
an economy by reducing the costs of
intermediation and by improving the
allocation of risk. Unfortunately,
however, in our country well-developed
financial markets are conspicuous by
their absence; nor do we witness any
robust investment and economic growth
any more. This argument, therefore,
leads to a profound question whether or
not the key regulator, i.e., State Bank of
Pakistan, has been efficiently monitoring
the functioning of the domestic market
with a view to evaluating its impact on
the economy. A readily available answer
could be that the central bank has been
performing its regulatory job towards
money market, the forex market as well
as the domestic financial market in an
efficient way. But this does not appear to
be the most plausible answer because
what people generally confront is a
reality that shows that the banking
sector has been demonstrating an
impressive performance but the
country’s economy has been witnessing
a sluggish growth particularly since
2007. The other question that keeps
gnawing one’s mind is that why the
banking sector has failed to effect in
recent years a generous distribution of
credit to support SMEs and regions with
a view to contributing towards efforts
aimed at broadening and building a
sound economic base. These two
profound questions have been
discerned from the write-ups in this
Review. The articles and interviews in
this publication address a number of
questions and issues relating to econom-
ics and finance such as finance, growth
and national integration; the rise and fall
of banking spreads; mortgage finance;
and an unconventional view on banking.
Last but not least, branchless banking
and Islamic banking seem to be the
buzzwords in the world of finance in
Pakistan. According to many, these may
be more of a solution than buzzwords.
Insofar as Islamic banking is concerned,
that has shown an impressive 10 percent
growth in a decade, this mode of
banking has become an important
segment of the global financial markets.
In Pakistan, we are witnessing the
operations of Islamic banking alongside
the conventional banking system.
Islamic banks have been anticipating a
bigger share of the pie and space in
coming months and years. They mainly
derive their confidence from Shariah-
compliant products that they offer to a
largely conservative Muslim society. The
other major reason behind their growing
optimism is the fact that already Islamic
financial institutions, in one form or
another, are operating in over 70
countries. Its huge success in Malaysia,
for example, is a strong case in point.
But what the proponents of Islamic
finance often overlook is the fact that
Islamic economics, as argued, for
example, by Muhammad Akram Khan in
his book What is Wrong with Islamic
Economics? Analyzing the Present State
and Future Agenda, has failed in part
because of its disproportionate focus on
issues of finance—both in terms of
providing Islamic financial products and
institutions to circumvent the perceived
prohibition of riba, and in terms of zakah
as a tool of public finance. Those who
strongly advocate Islamic banking as a
substitute for conventional banking are
required to make unstinted efforts
towards making Islamic finance a
coherent discipline and chart a way
forward for that discipline in the
country’s economic policymaking. In the
end, this newspaper wishes proponents
of both conventional banking and
Islamic banking a bright present and a
brighter future. Business Recorder will
always encourage a healthy competition
between these two modes of banking in
the larger interest of Pakistan, although
one must refrain from making a direct
comparison between Islamic banking
and conventional banking.](https://image.slidesharecdn.com/e57755e4-e2de-4cfb-9e12-82adbe4e1893-150422221140-conversion-gate01/75/Banking-Review-2013-Final-print-edition-4-2048.jpg)
![Citibank N.A. cautiously
optimistic about Pakistan
Meet Nadeem Lodhi, who rejoined Citibank N.A Pakistan as its Country Manager and
Managing Director in 2012. Prior to that, Nadeem was associated with Abraaj Capital where
he was heading the business for sub-Saharan Africa. During his earlier tenure at Citi,
Nadeem held various roles in Pakistan and Africa including the CEO for Uganda.
Belowistheeditedtranscriptofarecentsit-downwithBRResearch.
NadeemLodhi
Country Manager and Managing Director, Citibank N.A.
Nadeem kicks off the discussion by
explaining the business strategy of the
bank. “Globally, Citibank N.A. classifies
its banking business into two major
domains: consumer banking and institu-
tional banking. The institutional business
of the bank primarily comprises treasury
& trade services, advisory & investment
banking and corporate banking, which
forms the core essence of Citi’s opera-
tions worldwide.”
He explains that the bank remains at the
forefront of taking clients in Pakistan to
international capital markets and introduc-
ing new products from other geographies
by adapting them to local needs.
Recalling Citi’s feats, Nadeem says that
“fundamentally, Citi Pakistan is now a
wholesale bank serving its corporate and
institutional clients – all their other
offerings are designed to facilitate the
delivery of services to such clients. Some
of our most significant transactions include
Government of Pakistan’s first foreign
currency Sukuk, first local currency Sukuk,
first oil hedge in Pakistan and so on. We
have also been involved with the govern-
ment as Joint Arranger on three Eurobond
issues in 2005, 2006 and 2007 and the
OGDCL GDR issue in 2005.”
He emphasizes on how Citi’s business
model is different from other banks
operating in Pakistan and also explains the
rationale behind the bank’s limited market
presence - having just three corporate
branches in the country.
“Citi’s primary focus is to serve top tier
Pakistani corporates and public sector
entities as well as MNC clients present in
various locations across the globe with
heavy presence in the country. In Pakistan
we are uniquely positioned with a
well-entrenched franchise and continue to
successfully deliver value-added solutions
to this niche client base from areas of
structured financing, M&A advisory,
electronic payment solutions, export credit
agency supported financing, working
capital management and risk management.
Just to give you an example, we handle
over 50 percent of the total MNC trade
volume in the country,” he said.
Some of the most recent and significant
achievements of Citi include, jointly
arranging $130 million syndicated foreign
currency Islamic facility for Pakistan
International Airline (PIA) in October 2013
which was the second biggest transaction
in the last 2 years. The bank also arranged
$70 million FMO & OPIC supported
financing for Pakistan Mobile Communica-
tion Limited (Mobilink) in 2012.
On the investment banking front, the
bank holds a leading position in the
market. “We’ve recently advised Unilever
on share buy-back of Unilever Pakistan and
delisting from the Pakistani exchanges
which contributed to be the single largest
FDI in the recent history of Pakistan. The
bank also advised on AkzoNobel's sale of
its controlling stake in ICI Pakistan, and
acquisition of 35 percent stake of Pakistan
International Container Terminal by ICTSI.”
Among all the categories of institutional
banking, Lodhi terms trade and cash
business to be the anchor of the bank’s
business and the single most important
area that pours in flow into the bank, while
on the treasury front, Citi also provides
hedging and derivative to its clients
besides FX sales.
As part of its commitment to the
country, Citibank N.A. has been conduct-
ing road shows since last year to show-
case the potential of the Pakistani market.
In collaboration with the US State Depart-
ment, the bank also hosted an investment
conference in Dubai in June last year,
providing an opportunity to Pakistani
companies to highlight the multiple
opportunities available in the country to
US investors.
The bank is already Basel-III compliant
while other banks are likely to achieve the
same level in 2018, as per the plan
chalked out by the regulator. Further-
more, Citi is pioneering efforts to imple-
ment state-of-the-art technological
systems in line with a regulatory push to
automate banks’ operations.
Commenting on the ‘banking float’,
which is the duplicate money present in
the banking system between the time
when a deposit is made and when the
funds become available in an account,
Nadeem says that the State Bank of
Pakistan wants to reduce the banking float,
which “could be achieved through a
technology engine called Real-Time Gross
Settlement (RTGS). Citibank N.A. is
expected to be the first bank automated on
RTGS with the SBP in the first quarter of
CY14.”
When asked about the economic
backdrop, Lodhi said the bank remains
bullish about the Pakistani market in the
CY14. “Our niche clientele, mainly MNCs,
consider Pakistan to be in their top ten
growth markets. If they do well, it reflects
positively on our performance,”
comments Lodhi.
He believes that the energy sector is the
key area that will turn around economic
growth in the coming years and bring a
revival in the fiscal system. “The decision
to tackle the three Es [energy, economy
and extremism] is the correct formula
employed by the government and will
bear fruits soon.”
Interview by
Zuhair Abbasi & Sobia Saleem
“We’ve recently advised
Unilever on share
buy-back of Unilever
Pakistan and delisting
from the Pakistani
exchanges which
contributed to be the
single largest FDI in the
recent history of
Pakistan.”
31 / Banking Review 2013](https://image.slidesharecdn.com/e57755e4-e2de-4cfb-9e12-82adbe4e1893-150422221140-conversion-gate01/75/Banking-Review-2013-Final-print-edition-31-2048.jpg)
Uploaded bySohaib Jamali
Banking Review 2013 (Final print edition)
This document provides an overview of the Pakistani banking sector in 2013. It contains several articles and interviews on topics related to economics, finance, and banking in Pakistan. The editor's note provides commentary on the State Bank of Pakistan's economic review and monetary policies. It questions whether sufficient monitoring of the financial market has occurred and why credit growth has failed to support SMEs and regional development. The banking sector has shown strong performance but economic growth has been sluggish since 2007. Overall, the document examines issues facing the banking industry and economy in Pakistan.
Banking Review 2013 (Final print edition)
- 1. Monday, March 10,2014 | www.brecorder.com/br2013 Banking Review2013
- 3. BANKING REVIEW 2013| March 10, 2014 ContentsMONEYTHATPRAYS Ahmed Khizer Khan Chief Executive Officer, Burj Bank PAGE 24 BRANCHLESSBANKINGSECTION PAGE 25 MAPPINGTHEDISPARITYIN BANKBRANCHNETWORK ACROSSPAKISTAN PAGE 34 IMPROVINGMOBILEBANKING GROWTHPROSPECTS Qasif Shahid and Shamsulhaq Niaz PAGE 28 AGRILENDING Javeria Ansar PAGE 32 IMPEDIMENTSTOBUILDING ASTRONGERBONDMARKET Abdul Rehman Warraich PAGE 37 BARCLAYS: STRATEGYBYDESIGN Shazad Dada Chief Executive Officer, Barclays Bank PAGE 30 CITIBANKN.A.CAUTIOUSLY OPTIMISTICABOUTPAKISTAN Nadeem Lodhi Country Manager and Managing Director, Citibank N.A. PAGE 31 BANKOFPUNJAB: EYEINGTHEUNBANKED Naeemuddin Khan President and Chief Executive Officer, Bank of Punjab PAGE 35 SINDHBANKNOLONGER PROVINCIALINCHARACTER Bilal Sheikh President and Chief Executive Officer, Sindh Bank PAGE 36 FROMTHEEDITOR’SDESK PAGE 4 BANKINGBLUES Ali Khizar Aslam PAGE 5 PRIVATESECTORNOPRIMARY LEVEROFGROWTH Salim Raza PAGE 7 MEEZANBANKCEOANTICIPATES ALARGERSHAREOFPIE Irfan Siddiqui Founding President and Chief Executive Officer, Meezan Bank Ltd. PAGE 23 LOANDEMANDLOOKS ENCOURAGING Atif Bajwa Chief Executive Officer, Bank Alfalah PAGE 8 THERISEANDFALLOF BANKINGSPREADS Sobia Saleem PAGE 10 SUMMIT’SPLANSTO TURNISLAMIC Husain Lawai President & Chief Executive Officer, Summit Bank PAGE 12 HOWBASEL-IIIWILLIMPACT PAKISTAN,OTHERS Sayem Ali PAGE 14 VIEWFROMTHESTOCKMARKET Rabia Lalani PAGE 16 HABIBMETROEYES GROWTHINTRADEFINANCE Sirajuddin Aziz President and Chief Executive Officer, Habib Metropolitan Bank PAGE 15 BANKING: ANUNCONVENTIONALVIEW Syed Bakhtiyar Kazmi PAGE 17 SAVINGMORTGAGEFINANCE Sidra Farrukh PAGE 18 BANKINGATAGLANCE PAGE 20 Zuhair Abbasi Senior Research Analyst Sijal Fawad Research Analyst BR RESEARCH THE TEAM Sohaib Jamali Editor Research Rabia Lalani Research Analyst Ali Khizar Aslam Head of Research Murtaza Khaliq Creative Head Javeria Ansar Research Analyst Rabia Lalani Research Analyst Zuhair Abbasi Senior Analyst Hammad Haider Senior Research Analyst Sidra Farrukh Research Analyst Sobia Muhammad Saleem Research Analyst Adil Mansoor Research Analyst Naseem Waheed
- 4. Bankingisalwaysimportant Editor’snote 04 / BankingReview 2013 The publication of Business Recorder’s Banking Review 2013 has interestingly coincided with the release of State Bank of Pakistan’s latest quarterly review of the country’s economy that covers the period July-September 2013. A fresh central bank outlook, therefore, has thrown up an opportunity for us to make a brief comment on the banking sector in a more cogent and meaningful manner. While defending its decision of a hike policy in rate by 50 basis points to 9.5 percent in September 2013, SBP has argued that policy tightening had become imperative although monetary growth was already subdued as the growth in broad money supply (M2) during Q1-FY14 was only 0.2 percent, compared to 0.7 percent in the corresponding quarter last year. “[T]his trend can primarily be traced to a rise in the external deficit, which reduced the NFA of the banking system by 64.4 percent during the period,” according to SBP. The SBP report, through a footnote, explains that in absolute terms, “the NFA of the banking system declined by Rs 173.2 billion in Q1-FY14, compared to an increase of Rs 11.8 billion in Q1-FY13”. Explaining why NDA, on the other hand, posted an increase of 2.3 percent during the quarter, the central bank holds high budgetary borrowing from the banking system and lower net retirement of private sector credit responsible for the rise. Through another footnote or an additional piece of information printed at the bottom of the page, the bank argues why its decisions on interest rates are not based on the previous data, but on the forecast of macroeconomic variables. The SBP report, indeed, gives one a bigger picture of the country’s financial domain. Having said that, one however needs to admit the fact that a lot of water has flown under the bridges since September 2013 and the present shape of macroeconomic indicators amply explain why central bank policies are sometimes not truly forward- looking or perhaps, do not genuinely provide for the future. That our active financial institutions deliver significant and unique value to the country’s economy and businesses, investors, and savers is a fact that has found its best expression in the perfor- mance of our banking sector particularly since 2000. However, there exists a flawed, albeit widely popular, argument that well developed financial markets are correlated with economic development and that a sound and sophisticated financial system promotes the efficiency of investment and economic growth in an economy by reducing the costs of intermediation and by improving the allocation of risk. Unfortunately, however, in our country well-developed financial markets are conspicuous by their absence; nor do we witness any robust investment and economic growth any more. This argument, therefore, leads to a profound question whether or not the key regulator, i.e., State Bank of Pakistan, has been efficiently monitoring the functioning of the domestic market with a view to evaluating its impact on the economy. A readily available answer could be that the central bank has been performing its regulatory job towards money market, the forex market as well as the domestic financial market in an efficient way. But this does not appear to be the most plausible answer because what people generally confront is a reality that shows that the banking sector has been demonstrating an impressive performance but the country’s economy has been witnessing a sluggish growth particularly since 2007. The other question that keeps gnawing one’s mind is that why the banking sector has failed to effect in recent years a generous distribution of credit to support SMEs and regions with a view to contributing towards efforts aimed at broadening and building a sound economic base. These two profound questions have been discerned from the write-ups in this Review. The articles and interviews in this publication address a number of questions and issues relating to econom- ics and finance such as finance, growth and national integration; the rise and fall of banking spreads; mortgage finance; and an unconventional view on banking. Last but not least, branchless banking and Islamic banking seem to be the buzzwords in the world of finance in Pakistan. According to many, these may be more of a solution than buzzwords. Insofar as Islamic banking is concerned, that has shown an impressive 10 percent growth in a decade, this mode of banking has become an important segment of the global financial markets. In Pakistan, we are witnessing the operations of Islamic banking alongside the conventional banking system. Islamic banks have been anticipating a bigger share of the pie and space in coming months and years. They mainly derive their confidence from Shariah- compliant products that they offer to a largely conservative Muslim society. The other major reason behind their growing optimism is the fact that already Islamic financial institutions, in one form or another, are operating in over 70 countries. Its huge success in Malaysia, for example, is a strong case in point. But what the proponents of Islamic finance often overlook is the fact that Islamic economics, as argued, for example, by Muhammad Akram Khan in his book What is Wrong with Islamic Economics? Analyzing the Present State and Future Agenda, has failed in part because of its disproportionate focus on issues of finance—both in terms of providing Islamic financial products and institutions to circumvent the perceived prohibition of riba, and in terms of zakah as a tool of public finance. Those who strongly advocate Islamic banking as a substitute for conventional banking are required to make unstinted efforts towards making Islamic finance a coherent discipline and chart a way forward for that discipline in the country’s economic policymaking. In the end, this newspaper wishes proponents of both conventional banking and Islamic banking a bright present and a brighter future. Business Recorder will always encourage a healthy competition between these two modes of banking in the larger interest of Pakistan, although one must refrain from making a direct comparison between Islamic banking and conventional banking.
- 5. Banking ‘blues’Eversincetheglobalfinancialcrisisof2008 dawneduponus,Pakistan’sbankingindustry seemedstuckinalimbo.Althoughthecountry’s financialindustrywasn’tbigenoughtobeaffected bytheglobalmeltdown,thegrowingtwindeficits (fiscalandexternal)athomethrewupan opportunityforbankstonarrowdownthechoice ofbankingassetstogovernmentborrowing. With thewiping out of some of the credit extended to big ticket corporates and a virtual demise of consumer lending in its nascent stage, banks successfully ventured into branchless banking and mobile banking in collaboration with telecommunication giants. However, the shocks of high toxic assets, especially in SMEs and consumer sector, were too much to be absorbed by technologically advanced ways of banking. Toensuresteadyprofits,bankswereforcedto becomeefficientbybothreducingthemarkupand administrativecosts.However,intheprocessthey losttheprimefocusoffinancialintermediation. The industry-wide advance-to-deposit ratio (ADR) decreased from a peak of 75 percent in December 2008 to less than 50 percent by September 2013. The obvious reason behind this decline was the government’s financing needs that crowded out private credit as investment-to-deposits ratio (IDR) (primarily due to T-Bills) soared from 34 percent to 52 percent in the past five years. Consideringthatdepositsbasealmostdoubled since2007,theswingsinADRandIDRaretell-tale signsontheirown;thoughrealeconomicgrowth remainedsubduedintheperiod.Growthin depositsappearsimpressiveasitpacedwitha nominalGDPgrowthinahighinflationaryera, whichisalsoattributedtoover-relianceoffiscal borrowingonbankingsystem. The government’s borrowing stock from the central bank increased almost six fold - from Rs476 billion as of June 2008 to Rs2.77 trillion - as of January 2014. This increase of Rs2.3 trillion explains a two-third increase in bank deposits. Effectively, had it not been for such a huge increase in federal government borrowings, the profitability of commercial banks would have stagnated in the last five years. From Rs73 billion in CY07, commercial banks’ profits nose-dived to Rs43 billion in CY08 before hitting Rs178 billion in CY12. Despite these decent profits, bank penetra- tion continues to remain low as less than 15 percent of people have bank deposits accounts and those who have access to credit are even smaller in number. Even among those who have bank accounts, there are many who have no incentive to maintain their accounts as such. A majority of bank account holders are getting abysmally low return on their savings and the worrisome fact is that the trend has worsened over the past five years. The composition of CASA (current account and saving account) increased from 58 percent in CY08 to 65 percent as of September 2013. That’s how banks maintained their high spreads despite assets being skewed towards low risk and low return government papers. Higher spreads may have gotten bankers good profits, but the approach has long term repercussions for bankers as well as consumers. The former are going to face an asset-liability mismatch, once the fiscal house is in order and the government has no dire need of financing from the banking system. On the flipside, the latter is restricted from long-term financing and simultaneously depositor is not getting adequate return on its savings. That partially explains the fall of investment to GDP from 19 percent in FY07 to 14 percent in FY13 and domestic savings to GDP from 12 percent to 8.7 percent in the past six years. Recognizing these pitfalls, the central bank had been pushing the banks to focus on long-term deposits and to increase the return on demand deposits (saving accounts). First the SBP tried moral suasion. That, of course, didn’t work. Then it fixed the minimum deposit rate 5 percent, regardless of the fact policy rate reached as high as 15 percent. But commercial banks remained fixated with cost efficiencies by increasing CASA, to which the bonuses of liability managers were pegged. Later the SBP increased the minimum rate on saving accounts from 5 to 6 percent in 2007 but that was not enough as well. Finally, the central bank put its foot down and linked the deposit rates to the interest rates corridor. The linking of deposit rate is likely to compel commercial banks to look for riskier high return assets to maintain spreads. However, much more is needed to be done to kick off private sector lending. The government has to gradually move away from banking system to give room to private sector. Concurrently, macroeconomic conditions need to be improved to encourage bankers to lend to private sector and to whet a credit appetite among corporates and SMEs. Followingthechangeinpoliticalregime,the temporary resolutionof circulardebtamida gradualdeclineinnon-performingloansthat already beganbeforePML-N took office, confidencehasstartedtoreturntothecredit marketandthereisanensuinguptick inprivate creditoff-take.However,itssustainabilityis contingentupontheresolutionof structural impediments,suchasrelianceof fiscalfinancing onbanks,energywoesandbleak lawandorder. Thegoodomenisthatthegovernmentseems focusedonimprovingoveralleconomic conditions.Ithasaggressiveplansonprivatiza- tionandcorporatizationof publicsectorentities. Thatnotonlypromisestobringefficienciesinthe systembutalsohasthepotentialtoslashfiscal deficitby agoodmargin. AliKhizar 05 / Banking Review 2013 Continued onnextpage The good thing is that the SBP is cognizant of the need to develop housing finance as it not only caters to the need of millions of households and will also boost tens of allied industries by creating economic activities and generating employment.
- 6. 06 / BankingReview 2013 The writer is Head of Research at Business Recorder. He can be reached at: ali.khizar@br-mail.com Government’s borrowing stock from the central bank Rs476 billion asofJune2008 asofJanuary2014 Rs2.77 trillion Rs2.3 trillion increase The government also appears committed to resolving the energy woes by installing new capacities in coal and constructing dams. This does not only bode well for other manufactur- ing sectors but also provides a huge opportu- nity for banking system to indulge in long-term financing projects. Plus, Pakistani exporters, especially those in the textile sector, can generate high credit demand in the wake of GSP+. To date textile and power sectors demonstrate improvement in both economic and credit growth. In the backdrop of these improvements, banks ought to sway away from the attitude of lazy banking as gone are the days when banks can generate low cost deposits without much efforts and heedlessly deploy them to government papers. It is true that not all banks are heavily skewed towards government’s fiscal financing. A few banks have concentrated in the non-core businesses over the period, such as in trade finance. Then, benefitting from their presence around the globe, a few foreign banks have specialized in dealing with multinational clients. Then of course there is the treasury desk which has lately been the most important avenue within the conventional banking domain. In fact, bank treasurer in a few banks is deemed to be more powerful than the president of the bank. However, all these areas are not enough to fill the vacuum that will likely be created once the government loses its credit appetite. Banks ought to explore consumer segments including mortgage financing and have to penetrate SMEs; although it’s easier said than done as in the pre-crisis days the banks that ventured into these businesses suffered big losses and since then the industry has taken a cautious approach to these areas. One of the reasons why banks are reluctant to capture this segment is poor foreclosure and repossession laws. Be that as it may, the good thing is that the SBP is cognizant of the need to develop housing finance as it not only caters to the need of millions of households, but will also boost tens of allied industries by creating economic activities and generating employ- ment. Apart from the foreclosure problems, asset-liability mismatch makes these products too risky, as mortgage is usually a long-term asset while deposit base has a low maturity. This can be dealt with by creating mortgage finance companies, with long term funding, to extend credit through commercial banks to end users for a tenor of as long as 25 years. Similarly, the central bank needs to facilitate tailor-made lending products to SMEs. This can be done by giving banks the first right on the cash flows of these firms upon default and by virtue of this banks can have the incentive to facilitate small companies to make proper financial statements, budgeting and planning. Whiletheprecedingmeasurescanincrease creditpenetrationinsociety,thereisalsoa concurrentneedtobringalargechunkof unbankedpopulationintothebankingnetasmore than85percentofpopulationdoesnothavea bankaccount.Financialinclusionisamongstthe keyobjectivesoftheSBPandgovernment,asitis imperativeforcreatingasavingculture. A large chunk of population does not have access to banking facilities or uses them merely for checking accounts as they consider conventional banking un-Islamic. To this end, the most successful experiment has been the introduction of Islamic banking. Pakistan’s Islamic banking has grown to 10 percent of total banking size in a decade; it shows an immense potential in an economy where religious beliefs are deeply entrenched. Mind you, in the post-crises world Islamic banking is considered as a safe haven and the size of Islamic banking has grown at a much faster pace in Islamic countries such as Malaysia, the UAE, and Saudi Arabia. This is exactly why virtually all the big players are aggressively entering into this market segment. MCB is acquiring a majority stake in Burj Bank to open an Islamic banking subsidi- ary; it plans to quadruple the acquired entity’s assets size to over Rs200 billion. Then Summit Bank is transforming itself into an Islamic bank in CY14. Similarly, Islamic windows of Bank Alfalah, Standard Chartered and a few others are widening aggressively. While the gradual uptick in credit off-take, the extension of branchless banking and developments thereof may be seen as the winds of change. The trend towards Islamic banking with almost herd-like following may well bring the biggest tectonic shift in the history of country’s banking. Continuedfromprevious page
- 7. 07 / BankingReview 2013 Privatesectornoprimary leverofgrowth If Pakistan’s economy continues to grow at the pace it has in the last five years, it will take the country 80 long years to double its per capita income. India, by comparison, will take 11 years, Bangladesh, 14 years, and Sri Lanka, 12 years. This begs the question as to what is the prognosis for Pakistan recovering to the 7 percent GDP growth needed to match Bangladesh’s pace for doubling GDP. Our weakened growth capacity today is owed to the deepening of policy and market failures over time.Without addressing these, improve- mentsin theexternal business environment – such asremedying power shortages, and stimulatingregional trade– cannot providethe much needed growth dynamism. Policy and market failure The central ‘policy’ failure is fiscal, i.e., the persistence of a state devouring public debt to survive – owing to its distorted fiscal principles, which ordain that ‘only the little people pay taxes’ – the deeply embedded droit du seigneur of our political culture. This can be easily addressed, if the political will to challenge powerful plutocratic interest exists. ‘Market’ failure lies in increasingly ineffective economic governance. The state’s regulatory institutions have been politically ‘enveloped’, and development institutions, wound down. A complacent belief persists that the primary lever of growth will be the private sector. But that belief has proved delusionary. Our LSM and financial services sectors have, in effect, jettisoned any ambition to take up the leadership role in development. The investment-to-GDP ratio has declined to 13 percent. Within this, LSM has declined the fastest, in current terms from Rs350 billion to Rs 198 billion – or by 40 percent (or 60%, in constant FY06 Rupees). The banking sector – while it has greatly improved efficiency and convenience - has not grown over the last decade, relative to GDP: still stands around 33 percent. The private sector now takes only 48 percent (from 67% in FY06) of bank loans and investments, with the government taking 52 percent. Crowding out is becoming as marked as was under the government-owned banking regime – when a basic rationale for banks’ privatization was that they would divert lending to the private-sector. Borrowing by the SMEs – the largest national employer – is down to 6.5 percent of bank credit, from 17 percent in FY06. And regional participation in credit – essential for political stability that is catalytic to growth – has withered on the vine. LoansbybanksinKhyberPakhtunkhwahave slippedto9percentoftheirtotaldepositsinKP, downfrom12percentinFY06;inBaluchistan,to7 percentfrom9percent;andthefigureforAJKhas remainedataround4percent.Thecomparable figuresforSindhandPunjabare66percentand51 percentrespectively(thereciprocalrepresents investmentingovernmentsecurities).Invalue, thiscomestoRs800bnbeingtransferredfrom thesmallertothelargerprovinces. Access to finance creates broad-based growth. With general access constrained, wealth creation in Pakistan has consolidated around a small number of large business houses, and in particular regions, mainly central Punjab and Karachi. Inequality has grown sharply, inimical alike to creating demand, which is the other side of sustainable growth, and to political stability. Where we stand, until the state’s forfeited role in institutionalizing growth is understood, identified and powerfully vitalized, we will continue to drift. Focus on localized credit supply Elsewhere, over history, the state has played a strong role in building the economic base through distribution of credit to support SMEs and regions. During their development stage, from the mid 19th century onwards, banking systems in Europe and the US were tied structurally into this objective. Thus, banking licenses in the US restricted banks to operations within individual states, and sometimes, to single towns. The objective was to mobilise local savings for job-creation and growth within the communities. State governments fostered SMEs by requiring that state awarded contracts ensure a minimum component of inputs from the SME, usually 25-40 percent. Where suitable, states invested in small businesses, and guaranteed their loans. At the federal level, the Washington-based Small Business Association was created to facilitate legal and operational issues pertaining to SMEs, and to provide financial assistance by guaranteeing part of their borrowings. The German states (Landers) set up their own banks, the ‘Landesbanken’ that financed business and projects within the states, and are the apex banks’ (the Sparkassens) regional savings banks. Some 40 percent of Germany‘s banking system falls within this structure even today. Another strata of banks are the cooperatives, spread across the country. The original objective for all these institutions was again redeployment of local savings within the region. Regional banks were the funding sources for Germany’s famed ‘Mittlestand’, mainly family owned businesses that are today the backbone of German industry. In today’s leading emerging markets,thestate has played thedistributional roleinadifferent way. Whilebanking in most emergingmarkets started with largemetropolitan banks,thestate either retained ownership of thebanking system, or directed lending to ensurethatSMEs and theregions wereadequately supported. Wherebanks aredominantly government- owned, as in China(90%) and India (70%),the statebanks operatealong strictly-defined priorities for lending. In countries suchasBrazil andTurkey,wheremorethan40%of the commercialbankingsystemisgovernment- owned,therearespecialgovernment-owned developmentbanks,focusingonagriculture, SME,andinfrastructurefinance. Provinces must take the initiative For Pakistan today, the ‘fast-track’ route to galvanizing SME lending, which in itself is regionally distributed, would be if the provincial-owned banks (BOP, BOK, Sindh Bank) were re-chartered to work exclusively on the SME sector within their domain – the raison d’être for provincial banks was regional development, but all three provincial lenders now mimic national business strategies of the commercial banks. With provincial banks dedicated to the SMEs, SMEDA should be embedded into their operations; cross-reference of experience and information would make SMEDA a more effective development organization. Legal, bureaucratic and infrastructural impediments faced by SMEs would be redressed faster by provincial governments if remedial recommen- dations were filtered through the provincial banks and SMEDA – rather than put to provincial governments directly by the myriad small business associations. Also, given the rapid job-creation that a vibrantly growing SME segment brings, it is likely that provincial governments will come to see the provincial banks as important agencies for their own political success, and ensure high quality of professionalism and governance. To support this momentum, the federal government should set up a venture capital fund, with the participation of major commer- cial banks, to invest in individual SMEs with innovative business plans. The board should have a dominantly private sector composition, and appoint the CEO. Venture capital funding, and strategic and technical oversight should help develop successful transactions, highlighting the entrepreneurial potential latent in SMEs. This should provide the SMEs more reliable access to funding from banks. Progressively, the opportunity will develop for IPOs via the creation of a stock-market window for small companies, such as Alternative Investment Market for smaller growing businesses in the UK. Finally, another valuable support would be if government project contracts required the lead contractor subcontract or procure a percentage of the project value, a minimum of 25 percent from regional SMEs, as is the case in the US, and elsewhere. In short, the state needs to play a much stronger role in stimulating the development of the broad-base of the national economic pyramid. Together, the initiatives suggested will stimulate smaller businesses across the regions, create new jobs, and hasten national economic integration. SalimRaza The writer is a former governor of State Bank of Pakistan. Whilebanking in most emergingmarkets started with large metropolitan banks, thestateeither retainedownershipof thebankingsystem, or directed lending to ensurethat SMEs and theregions were adequately supported
- 8. “Loandemandlooks encouraging” BR Research: Howdo you see the new government’s performance so far and how has it impacted overall confidence? Atif Bajwa: We are optimistic about the future. I believe that there is a plan, and, hopefully, 2014 will move on a fast and positive track. The intention from the government is right. On the power issue, we already see improvements and I expect further development in the near future. However, I suspect that the bigger impact of initiatives will take some time as supply side bottlenecks have to be removed. Businesses are willing to invest in capacity and equipment modernisation. The big concern in the short run, though, is the balance-of-payments situation. The government is looking to raise sovereign bonds and trade finance facilities, whilst also seeking support from multilateral agencies. All of these efforts will start bearing fruit hopefully in the first half of this year. BRR: Will these efforts and improvement in business confidence help boost banking sector income? AB: As long as business confidence is backed by improved economic fundamen- tals and stability in the foreign exchange environment, it will be very good for the economy. It is not necessary that banks will make money off these developments in the short term. However, in the medium to longer term, stability and growth will lead to profitable results. BRR: Has demand started pouring in from the textile sector surrounding the GSP Plus scenario? AB: The numbers for loan demand are looking slightly more encouraging, but these may need to be adjusted for cyclicality of borrowing needs. Some clients are beginning to talk about expan- sion. There is interest in power projects and there are some enquiries about setting up alternate biogas and coal plants. But this will only translate into reality over the next few quarters. I wouldn’t say that there is a lot of activity at the moment. A key development has been that the bigger textile companies de-leveraged over the years, helping them in a volatile environment. As a result, these companies are doing well and their balance sheets are strong, and they are well positioned now to take advantage of lending facilities offered by banks. BRR: The lending to SMEs has largely been to the medium ones, with smaller ones often neglected. Do you see the trend shifting? AB: SME is a slightly tricky area. The banking sector’s exposure to SME has indicated a tilt towards larger sized enterprises. And that is only because a lot of banks have had their fingers burnt in SME lending in the past. Hence, it is only fair that they will all be a little more cautious. However, at Bank Alfalah, we have decided that we simply cannot ignore this sector, despite the fact that it has led to higher NPLs. That doesn’t mean we will blindly start pursuing avenues of lending in the SME arena. The fact is that the SME sector has suffered from a chronic lack of capacity. Their own understanding of business management seems inadequate. The sector has suffered from persistent power outages and a lack of access to markets as well, since Pakistan has become somewhat of a pariah. These are genuine issues that cannot be easily dismissed or neglected. Banks will have to abandon formula lending and develop a well thought-out model for SME Bbanking. At Bank Alfalah, we are already working on this and have restructured our SME approach with the help of IFC’s advisory service. We have developed a model that views SME operations holistically, instead of solely focusing on the lending part. Everything from their cash flows to their non-core operations will be thoroughly explored and understood. We also intend to help smaller businesses with their capacity building by providing them access to non-financial advisory services. Seemingly small aspects are important, such as how to manage accounts, how to set up a basic supply chain, educating them about requirements by banks, etc. And a little handholding goes a long way in improving compliance and performance of smaller units. To this end, we are, in fact, just launching an SME Toolkit in collabora- tion with IFC - this is an online portal which provides value-added resources including business advice, local and global best practices, opportunities and challenges to both existing and potential SMEs in the country. Such resources will play an important role in the long term, sustainable development of the SME sector. BRR: Do you have any new consumer products in the offing? AB: We are looking to introduce new products whilst refining some of our existing product portfolio, increasing our range of credit cards, introducing corpo- rate cards and better defining the tailored segmentation of products available for individual customers. We remain the largest issuer and acquirer of credit cards in the country and these initiatives should augment our efforts to retain that ranking. In addition to our mainstream financial solutions, we have also added a host of doorstep banking options including branchless, mobile and internet banking, and cash management to our suite. One of the key areas of focus for us this year is wealth management – we are keen to penetrate this domain but want to ensure that we base it on a comprehensive needs analysis of the market, so as to provide bespoke solutions to this segment. Not many banks have succeeded in Pakistan with their priority banking model, therefore, we want to take our time but try and do it right. BRR: How do you see CY14 in terms of deposit growth? AB: I wouldn’t forecast a dramatic improvement. The industry average in deposit growth is 13-15 percent, and that is mainly driven by money supply growth. The only real question is how much of that can be deployed in fresh lending. If you look at lending growth, the industry average has typically hovered between 8-9 percent. While our bank outstripped the market last year by growing at 18 percent, at an industry level, deposit growth will stay ahead of lending. We are hoping to build upon this momentum and keep up with last year’s performance. BRR: What is the major impediment your Islamic banking window faces? AB: We are the second largest Islamic offering in the country. Our Islamic deposits currently comprise 16 percent of the bank’s total deposits. From an industry perspective, Islamic banking is still the fastest growing area in banking. However, whilst deposits keep growing, the issue is more on the assets side. Islamic assets are very difficult to find, as there are not enough Sukuks or other such Islamic products. If you look at Islamic banks, their ADR is closer to 35 percent on average – the key reason for this is that they cannot find Sharia-compliant structured assets. The government could help by rolling out local and foreign currency Shariah-compliant Sukuks. BRR: Since you’ve been expanding with such aggression, your cost-to-income ratio is higher than your peers. How are you going to manage the human resource side of the expansion, whilst trying to keep a lid on costs? AB: Relative to the market, our staff-to- branch ratio is high as the size of our branches is bigger; hence the cost of maintaining a branch is higher.Our future growth strategy is robust; we are currently at 574 branches and plan to continue expanding our footprint by redeploying employees from our existing talent pool. Hence if you look at our figures, while our branches have gone up in number over the last 2-3 years, the head count remains flat. This also helps our efforts to provide our staff with cross-functional job rotations and opportunities in new roles within the bank. Interview by Ali Khizar AtifBajwa Chief Executive Officer, Bank Alfalah 08 / Banking Review 2013
- 10. 10 / BankingReview 2013 Theriseandfallofbankingspreads Oneofthegravestproblemsnailedto Pakistan’s bankingsystemsincetheinception offinancial liberalizationreformsinearly1990sisthe fact thatdepositorsarenotpaidan adequate return ontheir savings. The removal of the ceiling on lending rates in March 1995, followed by the withdrawal of SBP’s instructions on payment of returns to investors and depositors in June 1998, had a profound impact on the interest rate structure of the financial sector. Inearly1980s,bankswere advisedto declare profitratesonsavingdepositsafter obtaining clearancefromtheSBPon the proposedprofit rates.However,afterthefinancialliberalization, bankswereaskedtodetermine the returns payableonfundsmobilized frominvestorsand depositorsonthebasisofthe profitsandlosses incurredbythem,andtherequirementto seek approvalfromtheSBPonproposedprofitrates wasdispensedwith. Whilethelinkageoflendinganddepositrates withthepolicyratewasabonafidemovethat helpedtheobjectiveofmonetarytransmission,it alsoledtoagradualincreaseinbankingspread. The movement of weighted average lending and deposit rates of the banking system over the years gives an obvious impression that while the lending rates moved quite in tandem with the policy rate, charging adequate risk premium over and above, deposit rates lagged far behind. The widened gap between savings and deposit rates, also known as net interest rate spreads, that discouraged savings culture in the country on one hand, proved to be the engine of banking sector’s robust financial performance in the recent years. Thefactthatthebankingsector didn’tshare itsfortuneswiththedepositors,who are the majorfinanciertothebanks,ledto a depressed paceofdepositmobilization.Thisiswellevident bythefactthatdepositsnosedivedto lessthan 27percentofGDPbyFY13comparedto over 60 percentinIndiaandaround52 percentin Bangladesh.Incontrasttodeposits,the currency-in-circulationinPakistan ishovering around31percentofthedeposits. Growingcurrency-in-circulation implies depletionofdeposits,and vice versa.SBP ResearchBulletintitled“The Behavior and DeterminantsoftheCurrencyDepositRatio in Pakistan”revealsthatarisein currency-in- circulationresultsinlesserdepositsandhence lesser loanablefundsavailable with the banks. Thisrestricts banks’ ability to meet private sector credit demand and in turn impairs economic growth. To putthings in perspective, thebanks had focusedon private-sector lending beforethe crisisof2008. Privatesector lending was oneof the dominant contributors of themushrooming interest ratespreads. As of June2008,thestock of government securities was only16.4 percent, whilelending to theprivatesectorwas52.4 percent of their total assets. Post 2008 financial crisis, however,banks werehit by hugelevels of non-performingloans (NPLs), following which they juggledaroundwith theirasset-mixandturnedtheirgazefromrisky advancestolow-yieldinggovernmentsecurities inthepursuitof cleaningtheirbalancesheets fromthescarsof financialcrisis. Therisk aversestrategyassumedby the bankingsectorhadapropensityof dealinga deathblowtoitsbulgingspreads.Besides,the SBPalsoimposedtheminimumdepositrate (MDR)of 5percentperannumonallcategories of saving/PLS depositswitheffectfromJune 2008.Butthebankstactfully dilutedthe negativeimpactof balancesheetshiftandMDR onthespreadsby playingwiththeothervariable of theequation– deposits. A breakup of total banking sector deposits indicates that the share of fixed deposits has dropped from 35 percent in 2008 to 27 percent in June 2013. Conversely, current accounts grew from 27 percent to 30 percent of total deposits whereas saving deposits grew from 37 percent to 41 percent of the total deposits over the same period. Thechangeindepositmixof thebanking sectorlowereditsmaturityprofile,creating furtherincentiveforthebankstopark their fundsingovernmentsecurities;the government’sdomesticdebtmaturityaverages lessthantwoyears,whichmatchesthe asset-liabilitymaturity profiles.Intheprocess, banks’paceof depositmobilizationwasalso hindered:averageyear-on-yeargrowthin SobiaSaleem Interest rate spread Lending rate Deposit rate Trends in lending and deposit rates - 2 4 6 8 10 12 14 16 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 % Source: BR Research calculations based on SBP data Negative correlationbetweencurrency in circulation and deposit growth 5% 10% 15% 20% 25% 30% Jan -07 Jul-07 Jan -08 Jul-08 Jan -09 Jul-09 Jan -10 Jul-10 Jan -11 Jul-11 Jan -12 Jul-12 Jan -13 Jul-13 Source:BR Research calculationsbasedon SBP data Deposit (YoY Growth) Currency in circulation (YoY Growth)
- 11. 11 / BankingReview 2013 depositseasedto13percentin the five years after the2008crisis,vis-à-visan average growth of19percentinthefiveyearsbefore. Besides,overtheyearsthe bankingsector has significantlydiversifieditssourcesofincome. Non-markupincomeasaproportion ofgross bankingincomehasgrownsignificantlyin the recentyears,whichalsohelpsbuttresstheir bottomline.Thiscreatedawin-win situation for thebankswherebytheykeptNPLsata bayby ignoringtheprivatesectorcredityetsacrificing littleontheearningsfront. Connectingthedots,theMDRimposedbythe centralbankbackin2008couldneither trigger bankstorecomposetheirassetportfoliosin favorofprivatesectorlending;nor didit encouragesavingscultureasthe banksstarted mobilizinglowcost,lowmaturitydeposits. Bearinmindthatin2008,the SBPwas determinedtotaperthespreadsto boostthe savingscultureandtocompensate the depositorswell.However,inthe current backdrop,asbanksarenegligentoftheir core duty,keepingacheckonspreadscouldserve thedualpurposeofboostingdepositsaswellas privatesectorcreditoff-take. Themonetaryeasingof500basispoints betweenFY12-FY13coupledwiththeincreasein MDRfrom5percentto6percentin2HFY12and changeintheprofitcalculationmethodologyfrom minimummonthlybalancetoaveragebalance appearstobeanailrightinthehead,asit narrowedthespreadsfrom5.54percentinFY12 to4.86percentinFY13,alevelunseensinceFY05. While the banks wereexpecting themonetary tighteningtocreateabreathing spacefor their spreads,the central bank adopted theprinciple of“the worse, thebetter”. With theratehikeof 50 basispoints in September 2013, theSBP did notonlyraisetheMDR to 6.5 percent, but it also peggedittoSBP repo rate, leaving amargin of 50 basispointsbetween MDR and SBP repo rate (SBPrepo rateis 250 basis points less than the policyrate).With thesecond hikeof 50 basis pointsin November 2013, MDR clocks in at 7.5 percentwithbanking spreads hitting another 9-year lowof 4.5 percent in December 2013. The banks appear flexing muscles to combat the currentlevel of spreads by mobilizing currentaccounts and shunning saving deposits. Private sector lending also showed notable improvements during 1HFY14, which grew by 9.95percent vis-à-vis agrowth of 5.77percent duringthe similar period last year. Some attributethis growth to bethe long-awaited revival in banks‘ asset portfolios while others attributeit to banks’ lackluster participation in government securities auctions in 1QFY14becauseof uncertainty on the discountratefront. Whetherornottheprivatesectorcreditgrowth in1HFY14istherevivalofbanks’appetiteforrisky lending,onethingisforsure:iftheriskfreelending avenueisunavailableorbecomesunattractiveto thebanksorissharedwithadiversifiedinvestor baseotherthanbanks,bankswilldefinitelylookfor avenuestoparktheirsurplusfunds. That’sexactly whathappenedin1HFY14. The listing of government securities on the local bourses is also a positive development on this front. The move would take time to reap its desired results; but it would definitely cause a dent on the banks’ asset portfolios by sharing the pie of government securities with retail investors. Theideais that merely squeezingthebanking spreads to trigger privatesector lendingorto instill asavings culturein theeconomy would lead to nowhere. Banks aresmart enough. Sooner or later, they will play with othervariables of thespread equation and end up making attractiveprofits. Thewaytogoforwardisdirectedlendingor prioritysectorlendingtoboostavailabilityof credittotheprivatesector.Asimilartoolis adoptedbytheReserveBankofIndiawherebyall public,privateandforeignbankswith20and morebrancheshavetolend40percentoftheir adjustednetbankcredittosixprioritysectors definedbythecentralbank.Thesamestrategyis alsoemployedindifferentformsandshapesby SouthKorea,Japan,China,Brazil,Thailandetc. Stillattheendoftheday,twistingthebanks’ armsarestructuralissuessuchaspower shortages,securityissuesandaboveallbanking courts,whichmustbeimprovedtoturnthetables andreapthetruebenefitsofshavedmargins. Thewriterworksas ResearchAnalystat BusinessRecorder. Shecanbereachedat sobia.mesiya@gmail.com 20 30 40 50 60 70 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 % Source:BR Research, Federal ReserveBank of St. Louis Deposit-to-GDPratio India Bangladesh Pakistan
- 12. Summit’splanstoturnIslamic Husain Lawai isa seasoned banker who has worked both in Pakistan and the Middle East. Currently, he is serving as the President and the CEO of Summit Bank. In this interview with BR Research, Lawai talks about the bank’s plans to raise capital to meet its capital adequacy requirements as well as its plans of conversion to Islamic bank. Below is the edited transcript. Husain Lawai President and Chief Executive Officer, Summit Bank BR Research: Let’s take it from the top. Your equity is as low as Rs3.2 billion. How do you plan to restore financial stability? Husain Lawai: We have given a commit- ment to the central bank that we will be capital compliant by September 2014. We have already appointed a financial advisor in Abu Dhabi. We have also informed the arrangement to SBP that as a first step, we are offering $50 million additional capital, which will hopefully be raised by end of March 2014. BRR: Who is providing this amount? HL: We are receiving it from 4-5 investors. An in-principle commitment of $35 million has been made from one investor based in Abu Dhabi. One is from Bahrain, one is from Kuwait, two are from Malaysia and one is from Qatar. These are high net worth individuals. Our sponsors will be funding $11.5 million and if there is any shortfall in capital in September, our sponsors will subscribe it. The expected shortfall will be $10 million, which will be injected by our sponsors. BRR: When do expect the bank to start posting profits? HL: Over the next two to three quarters. BRR: If we look at the classification of your NPLs, most of the NPLs are in loss category. Is it because of full provisions? HL: Yes, for those NPLs no further provision is required. But although certain NPLs have been fully provided for, we expect to book full reversals for it. We expect more reversals in 2014. BRR: What is the biggest stumbling block in recovering bad loans? HL: Unfortunately, in Pakistan the judicial system favors the defaulter as opposed to the lender. It takes as long as 15 years to recover the amount as the defaulters want to exhaust all the appeals and judicial process. Such long delays in recovery of defaulted amount are detrimental for the banking sector. BRR: What is your view on the corporate rehabilitation act? HL: I am in favor of the act, but not in its present shape. We have already suggested a number of changes. The corporate system should be aligned with what is happening around the globe. We should give the borrower a reasonable time, say of 6 to 8 weeks, to submit remedial plan for rehabilitation of the project. The bank should give time, of say 11 months, to implement the rehabilitation plan and monitor key performance criteria. If the borrower fails in implementing its plan, then the bank should take over and dispose off the project or business. This should all happen with the support of high court or banking court. BRR: Can we safely say that the worst is over for Summit Bank? HL: Yes. The last quarter of 2013 was the turning point. We can assume that the economy will also be doing better. I am positive as long as the government goes for structural reforms rather than going for cosmetic measures. BRR: Do you think the linking of minimum deposit rate with discount rate is a positive development? HL: In the long run, yes. In the short run, however, some banks will feel a pinch. BRR: Why are banks not penetrating into the lower end of the market? HL: It is because the cost of opening branch has gotten very high. It costs roughly Rs15 million; setting up an IT system, installing and providing the branch infrastructure, etc. We are in conversation with the central bank, to build something which is between a booth and a branch with only a three person staff. Using a satellite we can provide services of paying utility bills, collecting home remittance, etc, to our customers in areas where there is no branch. If they want to open an account one person can assist over there and the rest of the processing can be carried out from the branch. BRR: What kind of innovative lending products are you thinking to launch? HL: We plan to go for small tickets which give better return. We have launched a scheme called “Sonay Pe Sohaga”, where we will allocate some funds to our consum- ers which will be guaranteed by the companies they are employed in. They will not be just plain vanilla consumer loans; they will be pegged by corporate guaran- tees. We have already entered into arrangements with leading corporate companies. Apart from that we are negotiating with prospective customers. BRR: There is a lot of talk about Summit’s full-fledged transition to Islamic banking. What is the actual plan? HL: In March 2013, our board of directors announced that this transition from conventional banking to Islamic banking should be carried out in the next 5 years. But now we are planning to do it in 3 years. This is because if we compare the conventional and Islamic banking sectors, Islamic seems to be growing at a faster rate in Pakistan. Moreover, our Chairman Mr. Naseer Lootha was the pioneer of Islamic banking in the world when they launched Dubai Islamic Bank. Hence, from the time when he took over Summit, he has been eager to pursue Islamic banking. The merger of three banks was a good learning experi- ence for us and in the next three years, we look forward to operate as an Islamic bank. BRR: What is the reason behind this shift from conventional to Islamic banking? HL: There are three reasons for this. One, growth potential is significantly higher for Islamic banks. The other reason is that if we continue to function as a conventional bank we will not be able to sustain as a major player in the sub-sector of the banking sector. On the flipside, if we shift to Islamic banking, we will be among the top three. The third reason is that there is a lot of gap in the Islamic banking market. In my view Islamic banks in Pakistan are not offering true Islamic products; they just change the label. BRR: Do you think your customers will switch from conventional to Islamic banking? HL: Actually, we conducted research regarding this last year. Earlier we were of the view that we should maintain conven- tional as well. After the survey, however, we concluded that 95 percent of the customers – that include both depositors and borrowers - were willing to switch to Islamic banking. In addition we also look forward to attracting new customers. BRR: What kind of products do you plan to offer as an Islamic bank and what will make them stand out from other Islamic products being offered by other banks? HL: Our main thrust would be on two products, Mudaraba and Musharaka. When I was the president of MCB we introduced Musharaka; we offered it to some textile units and steel mills. This was carried out after conducting extensive research on these industries and the returns were greater than the interests received earlier. BRR: What is the structural plan for conversion over the three years? HL: We will be starting from March 7 this year; we have already received the approval from central bank to conduct Islamic banking. We are starting from the conversion of one branch, which is the one on I.I. Chundrigar Road, Karachi. The customers associated with this branch will be informed about the changes. Of those the ones who wish to continue with Summit will be offered Mudaraba,Musharaka and Ijarah later. The process of converting branches will continue, and we hope to achieve complete transformation in the next three years. BRR: How many new branches are you going to open in 2014? HL: We did not apply for branches in October 2013, but we hope to take our decision about it in March 2014. A maximum number of 10 branches will be opened during 2014. Instead we plan to improve the performance of existing network. At our national conference this year we plan to address the area managers and regional managers and discuss ways to improve the productivity and efficiency of each branch and each employee rather than opening new branches. We will give more attention to those branches that are not doing well and then we might shift them or take some other measures. Interview by AliKhizarandSobiaSaleem 12 / Banking Review 2013
- 14. 14 / BankingReview 2013 HowBasel-IIIwillimpact Pakistan,others The Basel-III regulations have come into effect from January this year. These regulatory changes are to ensure that history doesn’t repeat itself in the form of another 2008-like financial crisis. The changes to banking capital requirements will have a wide-ranging impact on bank lending practices and credit availability to the private sector over the next five years. State Bank of Pakistan’s circular, issued on August 15, highlights the Basel-III reforms agenda and implementation timeline. The major changes pertain to the raising Capital Adequacy Ratio (CAR) to 12.5 percent in a phased manner by end of 2019, up from 10 percent today under the Basel-II framework. The additional capital requirement is part of the Basel Committee on Banking Supervision's recommendation to introduce an additional 2.5 percent Capital Conservation Buffer (CCB) on the banks. It is important to note that the SBP is implementing the Basel-III capital ratios at 2 percent above the Basel Committee's recommendations of 10.5 percent (8% of total capital + 2.5% conservation buffer) to act as a buffer for the additional capital that may be required because of modelling shortfalls. The Basel-IIIregimeincludes several elementsthat will bephased in between 2013 and2019:a capital conservation buffer (2.5%), a countercyclical capital buffer (0-2.5%, depend- ingon conditions), and abuffer for global systemically important banks (1% for each). Under the Basel-III regime, there are also limitations that will be imposed on bank lending in case CAR falls below the 12.5 percent requirement. In particular, banks will need to reduce lending against its CE (Common Equity) Tier I of CAR. The changes in Basel-III are expected to lead even well capitalized banks in EU, US and emerging markets to find it hard to be compliant. Pakistani banks are well capitalized with CAR of 15.6 percent (September 2013), with Tier 1 capital making up over 13.4 percent. Hence, even with Basel-III implementation most of the banks will easily meet CAR requirements. According to SBP’s estimates, the CAR of banks would drop to 14 percent under Basel-III regulations – still above the prescribed limits. However, there will be some crowding out of smaller banks, which will support mergers & acquisitions in the financial sector. Within theemerging Asian markets, Indian banksare likely to bemorecapital-constrained than peers.TheReserveBank of Indiaestimated in itsannualreport (August 2012) that Indian banksface an equity shortfall of $35 billion on accountofBasel-IIIimplementation. Banks in China have thenext-highest capital requirement of $14.5 billion, largely driven by highnominal GDP growth. US and European banksfacean uphill challengeand may bethemost significantly impacted as aresult of Basel-III. In May 2012, Fitch Ratings published a study on potential pressures on 29 Global Systemi- cally Important Financial Institutions (G-SIFIs – the ‘too big to fail’ banking giants) arising from Basel-III. According to Fitch, the average G-SIFI bank would have to raise $9.5 billion of common equity to comply with Basel-III rules. The aggregate amount for the 29 banks would be a whopping $566 billion. This shortfall would be met by a combination of earnings retention, equity issuance and reduction of risk weighted assets. Maintaining higher capital levels over the longer term under Basel-III is likely to lower banks Return on equity (ROE) as they face higher capital costs. According to a Fitch study, large banks globally would see an average ROE decline of 20 percent as a result of Basel-III implementation. Another study, conducted by McKinsey at end-2010 for European banks, estimated the ROE impact on European banks at 30 percent. If banks are unable to raise the equity required under Basel-III (and necessitated by its second-round impacts and by European bank deleveraging), they are likely to curtail lending to corporates, creating a financing gap. Our estimates suggest an aggregate shortfall in corporate lending from banks at over $340 billion over the next five years. In Pakistan, acombination of tighterlending requirements and crowding out ofprivatesector credit arealready driving corporatestoraise funds from debt & equity markets.Asgrowth picks up and credit demand growsstronger,one can seesignificant new TFCfloatedinthe markets over thenext few years. Pakistan’scorporatebondmarketisverysmall ataroundanestimatedRs350billion,whichis around1.5percentofGDP,andonlyatenthinsize ofthetotalgovernmentbondmarkets. Traditionally, banks havebeen theprimary funding sourcefor corporatein emergingAsian markets. However, thecompositionof corpo- ratefunding is likely to changeoverthenext decade. Whilesomeof this expectedshiftwillbe structural as theregion’s bond and alternative funding markets develop, it is likelytobelargely driven by constraints on bank funding. Basel-III and deleveraging by European banks are likely to cause a structural shift in the composition of corporate funding; prompting more corporates (especially higher-rated ones) to access bond markets directly rather than borrow from banks. This is likely to increase the size of the regions corporate bond markets over the medium term. The shift is already under way as big corporates turn to the bond market for longer-term (and, arguably, less covenant-heavy) funding. In 2011, Pakistan saw two large corporate giants Engro and KESC raised Rs4 billion and Rs2 billion respectively through issues of Term Finance Certificates in 2011. Standard Chartered Pakistan successfully closed a ten-year Rs2.5 billion TFC, marking the largest offering in Pakistan by any financial institution in 2012. The key question is that will there be enough demand for all the corporate bonds likely to be issued in Asia? In our view, while international investment is likely to rise, a large part of the incremental demand will come from local investors. If Asian government bond markets are any indicator, international investors own less than 25 percent of the local-currency bond markets, while domestic financial institutions own close to 60 percent. In Pakistan, the foreign investment in government bonds is less than 5 percent; nearly 95 percent is from domestic investors led by banks. Local currency bond markets in Asia are currently fragmented and very local. If they need to grow exponentially in the next decade to fill the gap left by reduced bank lending, greater cross-border mobility and intra-regional fund flows will be required. The local markets are at varying stages of development. Some are still trying to establish a sovereign yield curve, whereas others have well-developed corporate bond markets as deep as those in the US or Europe, with corporates issuing bonds across the maturity and rating spectrum. Thedominanceofquasi-sovereignissuersand financialinstitutionsisanotherconcern.Issuance fromtheprivatesectorisstilldominatedbyhighly ratedcorporates(AAandaboveonthelocal scale),withaccesstoBBB-negativeandlower ratedissuersheavilyrestricted. Thestrongroleofthestatesintheseecono- miesisonereasonforthis;butitalsoreflectsthe earlystageofdevelopmentofcorporatebond marketsandtherisk-seekingbehaviouroflocal investors.Lower-creditqualityborrowersneedto beabletoaccessthebondmarketsinordertofill thegap,muchasinthelargerandmorevibrantUS high-yieldbondmarkets. SayemAli The writer has worked as economist Middle East, Pakistan, and North Africa at Standard Chartered Bank. His views do not necessarily represent those of the organisation. If banks are unable to raise the equity required under Basel-III (and necessitated by its second-round impacts and by European bank deleveraging), they are likely to curtail lending to corporates, creating a financing gap.
- 15. HabibMetro eyes growth intrade finance Sirajuddin Aziz is currently associated with Habib Metropolitan Bank as its President & CEO. During his 35-year banking career with international as well as local banks, he held several senior management positions in various countries including Pakistan, the UK, the UAE, Nigeria, Hong Kong and China. During his career, Aziz has contributed to various professional bodies including Pakistan Banks’ Association as Chairman. He has been a regular speaker on credit, trade and foreign exchange at “The Institute of Bankers Pakistan” and other prestigious institutions. Aziz also frequently contributes articles to newspapers on various subjects. SirajuddinAziz President and Chief Executive Officer, Habib Metropolitan Bank When it comes to the economy at large Aziz minces no words in expressing his concerns. “Pakistan’s tax-to-GDP remains one of the key economic variables in the current economic environment, which can be described as sluggish at best.” He adds that “FBR’s tax collection numbers bear evidence of the rampant mindset of not paying taxes,” hoping that the current government would augment revenue by introducing tax reforms. Linking the fiscal discipline with banking sector, Aziz said that while banks are doing well in terms of growth and profitability, the risk free borrowing environment has affected the strategy of the overall sector. “The presence of risk- free borrowers impacts the lending spectrum – and consequently the portfo- lio of advances; banks shy away from extending credit to the relatively riskier private sector alternate,” he said. Aziz is hopeful that with interest rates back on an upward trajectory, banks can be expected to post higher topline growth. He expects the industry to strategize towards core advances as “banks cannot sustain their books solely on government securities.” Contrary to popular opinion, Aziz is of the view that banks are now better poised to revisit consumer financing. “At the moment, banks enjoy a competitive spirit among them and are faced by a discern- ing customer base.” HabibMetro has stayed abreast of the industry growth curve. The bank is currently operating on the strategy of organic growth and is penetrating new locations with its presence. From 183 branches in 2012, out of which 100 were in Karachi, HabibMetro’s branch network has grown to 214 branches, spread across 49 cities, as of the end of 2013. “We are one of the leading trade finance banks, which handles a significant share of Pakistan’s total trade business. One of the practices and strategies that has enabled the bank to capture this ever- growing market share is transactional integration, whereby we handle both legs of the transaction,” says Aziz. Trade finance will continue to be the business segment of interest for HabibMetro according to Aziz, since in addition to its viable self-liquidating nature it offers derivative products which increase its appeal versus other business segments. Addressing the passive lending preva- lent in the banking sector, Aziz said that “large banks enjoy the inherent advantage of low cost deposits and can indulge in this risk-averse practice.” However, he believes that lending opportunities will widen with economic growth and devel- opment that is complemented by improvement in law & order and resolu- tion of energy issues. However, he points out that resource generation will prove to be challenging for the banking sector, with the products offered by different banks being more or less the same. In this competitive environ- ment, HabibMetro’s advanced technologi- cal platform provides a competitive advantage by offering fast pace banking solutions at the push of a button. “HabibMetro has been a trade finance bank since its inception, and hence its credit business is significantly greater compared to other similar sized banks,” said Aziz before emphasizing the viability of trade for any developed or developing country. Being a trade finance bank, the lender has had its share of NPLs emerging out of the global financial crises of 2008, onwards. Briefing about the NPLs, Aziz explains that a close examination of the entire banking sector NPLs would show that most NPLs were a result of export finance, where the buyer of Pakistani goods, defaulted. However, Aziz maintains that HabibMetro’s NPLs were on a decline and in control. On the subject of deposit mix, Aziz believes that saving deposits are stickier and in that respect cost efficient, which is why they form a notable quantum of HabibMetro’s deposit base. However, he is not very enthusiastic about the decision to peg deposit rates with the discount rate and asks for it to be reviewed for the sake of financial viability. Commenting on the diversification in HabibMetro’s exposure and composition of advances; Aziz says that high concen- tration of credit exposure in the textile sector earlier has now taken the form of well diversified exposure across a number of sectors. He adds that due to expectations of greater economic and business activity, the trade-oriented bank’s lending – and hence ADR - is expected to witness an increase against a trade-off with the IDR, which is expected to decline. “By Decem- ber 2014 we can expect HabibMetro’s ADR to mark at 55-58 percent,” adds Aziz. Praising the State Bank, Aziz said it is “the best regulator in the region”. “They have been extremely proactive in regulat- ing the market and have dealt with the financial crisis of 2008 proficiently, preventing the banking industry from being aggressive. The regulator’s mecha- nism of inspection, which was transaction-oriented earlier, has also exhibited remarkable improvement and is now more risk-based. With major opera- tional transformation, the SBP now serves as a model for local and international banks,” he concludes. Interview by Ali Khizar & Sobia Saleem By December 2014 we can expect HabibMetro’s ADR to mark at 55-58percent 15 / Banking Review 2013
- 16. 16 / BankingReview 2013 RabiaLalani Viewfromthestockmarket ForayearthatsawbenchmarkKarachiStock Exchangegrowby49percent,2013 sawbanking stocksunderperformthemarketby17 percent. Thiswasbotharesultofmacroeconomic conditionsinthecountrythatkeptprivate sectorcreditincheckandbank-unfriendly initiativestakenbySBPduringthe year. To jog down the memory lane, the SBP increased minimum deposit rate on savings account from 5 percent to 6 percent during the year. Later, it linked minimum deposit rate (MDR) with the repo rate, thus limiting banks’ merry-go-round sessions. Linking MDR in times of monetary tightening, however, proved difficult for banks, especially for those which had higher savings deposits as percentage of total deposits. This prompted banks to alter their deposit mix to lower their costs. In the meanwhile, the exemption of Islamic banks from this regulation gave them a reason to cheer about. On the flipside, a major boost for banks came from improved asset quality. Although increase in discount rates prompted banks to focus on investment in risk-free government securities than on private sector credit, leading to improvement in non-performing loans and robust coverage ratios. Lookingahead thereis somelevel of optimismin thebanking sector which is expectedto outperform in 2014 as the dynamicsarechanging. According to Ujala Adnan,a banking analyst at Elixir Securities, Islamic banking, branchless banking and cost-rationalization arethekey areas that banks are drumming on to thesedays. Sheasserts that asassetquality of thebanks has improved considerably, privatesector credit off-takeis likelyto shoot up going forward. Contrary to this, Iqbal Dinani, a sector observer at BMA Capital, is a bit cautious on banking sector. He believes that margins might not increase substantially as banks have heavily invested in risk free government securities where margins are quite narrow. However, Dinani considers that focusing on increasing advancing activities will help the performance of banks to come on track. Higher coverage ratio and lower NPLs are the key strengths of banking sector at this stage. He says the banks may start lending prudently during 2014 while aggressive lending is likely to start from 2015 and onwards. In this context, BR Research conducted a survey of equity fund managers of leading asset management companies regarding their outlook of banking sector. The survey represents nearly 77 percent of the entire fund size of the mutual fund industry. Thesurvey reveals that fund managersdeem banking sector at this stageas a“defensive”play, terming macro-economicconcernsparticularly depressed privatesector credit off-takeand compressedmarginsastheculpritsattheback of mutedperformanceof banks. Most fund managers say that dividend payout announcements and further monetary tightening can help pick up the performance of banking stocks on the local bourse, provided uptick in business activities and increase in credit off-take bring this sector back in limelight. In short, the consensus stance on banking sector is weighted as “neutral” in the short-term, whereas any improvements at the macro-economic level may act as a trigger and lift the stance from “neutral” to “positive”. Thewriterworksas ResearchAnalystat BusinessRecorder. Shecanbereachedat rabialalani@gmail.com Bank Habib Bank Limited National Bank of Pakistan MCB Bank Limited United Bank Limited Bank Alfalah Allied Bank Limited Bank AlHabib Meezan Bank Limited BankIslami Pakistan Askari Bank Stance Market weight Market weight Under weight Market weight Over weight Market weight Over weight Over weight Over weight Market weight M.P 25-Feb-13 158.69 57.35 266.77 133.51 27.98 88.79 39.51 37.48 8.96 13.37 T.P 147.92 54.24 249.63 137.40 29.01 90.61 46.07 44.00 13.00 14.00 Highlighting Traits Improvement in CASA and NIMs Significant reduction in CASA and focus on islamic banking Attractive NIMs and strong recoveries Improvement in asset quality and attractive NIMs Deposit growth due to branch addtions and improvement in CASA mix Strong non-interest income and strong equity portfolio Improved asset quality, fast NIM growth and attractive coverage ratio Pioneer of Islamic banking, strong brand equity Tremendous deposit growth and lower cost of funds Declining NIMs, with huge NPLs * Calculated on average market prices Valutation Summary of Banking Sector Stocks Source: Average estimates of following brokerage houses: AKD Securities, Global Securities Pakistan Ltd, Topline Securities, Taurus Securities Ltd, JS Global, Foundation Securities Ltd, BMA Capital, KASB Securities, Optimus Capital Management, Elixir Securities Ltd 2012* 6.29 5.28 8.65 4.86 4.71 6.03 5.50 6.97 11.97 9.36 2013* 7.94 9.42 11.62 7.05 5.95 5.24 6.39 8.40 26.09 N/A 2014 8.24 7.67 11.21 8.16 6.72 7.84 6.56 7.35 6.35 16.92 P/E 2012* 1.11 0.56 1.61 1.02 0.71 1.28 1.25 1.48 0.88 0.60 2013* 1.22 0.69 2.36 1.37 0.84 1.28 1.31 1.80 0.66 1.30 2014 1.35 0.78 2.32 1.58 1.08 1.40 1.41 1.77 0.77 1.09 P/BV 2012* 6.6% 14.4% 7.4% 11.8% 13.7% 8.6% 10.1% 5.5% 0.0% 0.0% 2013* 6.4% 8.5% 5.6% 9.0% 9.6% 7.1% 9.2% 4.6% 0.0% 0.0% 2014 5.9% 10.3% 5.8% 7.3% 8.6% 7.0% 8.5% 5.3% 0.0% 0.0% Dividend Yield SWOT analysis of the banking sector Strengths: Stringentregulatoryframework Robustriskmanagementpractices Significantgrowthindepositbase Minimumcapitalrequirementsadequatelysatisfiedbyallbutfivesmallerbanks Sufficientbranchnetwork Increasingfocusonnonmark-upincome Weaknesses: Lackofinnovativelendingproducts Highdependenceonspreads Increasedinvestmentingovernmentsecuritiesresultingindepressedprivatesectorcreditoff-take Highpercentageofsavingsdepositsasapercentageoftotaldeposits Continuedmonetarytightening,whichmayhamperthegrowthincreditoff-take ListingofgovernmentsecuritiesandcorporateSukuks Attractiveratesonnationalsavingsschemes Freshprivatesectorcreditoff-take Increaseinmarketsharethroughinternetandmobilebanking, whichcanreduceoperationalcostsovertime Introductionofnewproducts,suchasbranchlessbanking Opportunities: Threats:
- 17. 17 / BankingReview 2013 Banking: Anunconventionalview Banks are the overseers of a nation’s premier asset, its savings deposits; unless of course that nation is blessed with surplus oil reserves in which case the government could care less about monetary shenanigans. Frankly, oil rich autocracies, which are the rule by the way, need neither indulge in brilliance of conception nor excellence of execution, petrodollars buy everything. Economists, the forbearers of doom, have even managed to showcase oil wealth as a disease and coined a phrase for it. Still, all nations dream of being compared with the Dutch, and for good reason too. Empirical evidence clearly establishes that booms are sweeter for oil rich nations and recessions avoid them like the plague! Pakistan’s dreams for oil elephants are far from fruition; accordingly the nation, by default, has to ensure efficient utilization of all other resources, if it ever expects to be elevated to the ranks of developed nations. The standard formula for development of an agricultural economy is through an industrial revolution, which requires investment of its savings in projects that create employment and increase productivity. Banks can play a pivotal role in channelling precious resources either towards self sustainability or funding wasteful consumer choices leading to abject dependence; or worse. The evolution of banking remains dependent on the mischief of money and ever since the invention of fiat money, the business of banking is potentially riskier than an invasion force armed to the teeth with WMD; sub-prime and euro debt crises are proof of the carnage and chaos banks are capable off. For a long time preceding the crises, it was actually believed that money and its ilk had actually moderated, or was it tamed, the business cycle; a clever idea down the drain. Business cycles rule supreme, unchallenged; what fools these mortals be! Governments were always cognizant of these associated hazards, if not their ferocity, and have endeavoured to establish a foolproof regulatory regime for banking; unfortunately never succeeding. The events of 2008 have effectively exposed the inability of the latest banking standards established under the Basel Accord to identify a storm, let alone prevent it. If Basel-II had been remotely effective, the double jeopardy should have been prevented, so why invest in Basel-III? Rationally, prescient and sincere legislation would have kept banking simple; why approve complex derivatives contracts in the garb of innovation, which nobody understands, not even their inventors. Nonetheless, and irrespectiveof thetenacity ofthe fraudsters to dream up innovativeand unfathomableschemes to regularly and repeatedlydefraud thepublicout of their deposits,banking remains theonly vehicleto mediate between savers and investors. So while the catandmousegamecontinues between the bankersand their regulators, what matters most isthe scorecard. Has thebanking sector of the nation succeeded in efficiently deploying the monetaryresources of thenation? Notice that the profitability of individual banks or profitability of the banking sector as a whole were not included in the scorecard statement, in fact they don’t even merit a footnote. Surprised? Conventional wisdom dictates that a strong and growing banking sector is a barometer of a nation’s economic prosperity. As of now, all the banks in Pakistan are profitable, and in fact some are doing exceptionally well for a number of years. This prosperity, if the idea had been on the money, should have translated into, a booming national economy, a strengthening rupee, low inflation, a reducing trade imbalance, increasing foreign reserves, a depleting national debt and full employment; which obviously it hasn’t. Another clever idea down the drain! A small clarification at this point; this is neither the forum nor is there sufficient space to get into a protracted critique of western dogmas; logical conclusions will have to suffice. On the other hand the simplicity of the preceding deductions stands witness to their authenticity, if the objective had been deceit and fabrication, complex and muddled articulation would have been the preferred option. Frankly, the propensity of domestic intelligentsia to readily accept any theory stamped “Made by Gora”, without independent thought, is remarkable. Onceagain,whereisPakistanonthescorecard? The economy is hardly booming, sectors in desperate need of funding are seemingly denied credit. Other than debatable power projects there has been hardly any project investment that merits a special mention, unemployment has reached epidemic proportions and the situation of the rupee, foreign currency reserves, trade deficit and rising national debt are regular “breaking news” on the electronic media. Except that the banks are making money! Ignoring that the “spread”, the difference between interest rates, which the banks pay their depositors and what they charge their lenders, is quite judicious in Pakistan, if the real economy is reeling, why are the banks allowed to make money? Puzzling indeed! Don’t forget the foundations of banking business are built upon monopoly rent and banks are protected by stringent entry barriers; establishing a bank requires a government license which is not easily forthcoming. Apparently banks are lending the savings of the nation back to the government and earn a spread thereon, and there is nothing illegal about that. Admittedly, the big banks were privatized to circumvent government hegemony on banking credit, but in an uncertain and highly-charged environment, the banks cannot be blamed for choosing the less- risky option, lending to the government rather than to the private sector, especially when the spread remains high. Another avenue for deployment of banks’ funds is the equity market. Considering the frequent debacles, it is a wonder that like direct investment in property, stock are not on the regulator’s restricted list. Especially when funds diverted towards equities cannot be utilized for projects in the real economy. Once again, theories on the importance of the stock market are sidestepped; the dotcom of the late 90s should be sufficient evidence of their veracity. “It is said that the world is in a state of bankruptcy, that the world owes the world more than the world can pay,” Ralph Waldo Emerson. Brilliant articulation which can easily be broken down into its sub-sets, simply substitute the word “World” with “Pakistan”, or most any nation today, for that matter! Globally, banks were bailed out and remain hugely profitable, the stock markets are again booming, property prices are again reaching bubbling heights, governments continue to borrow unfettered and all this courtesy central banks, who continue to ease money supply. Everyone making money is fine but what about the populace? Before moving towards a conclusion, a few statistics, which the editor informs, are apparently necessary to establish credibility; which is rather amazing since hardly anyone understands them. Broad money, M2, increased from Rs8.39 trillion in May 2013 to Rs8.93 trillion in Novem- ber 2013, which establishes that easing is progressing with ease. Most of this money ended up in the form of deposits with banks that at December 2013 have invested or lent Rs4.1 trillion to the government as compared to Rs3.1 trillion to the private sector, although there is an increase in private sector credit since June 2013. How much exposure that banks have in the stock market requires an in depth analysis, which would hardly improve the basic premise, and hence the particular enterprise was not embarked upon. With that out of the way, it is fashionable to be a Keynesian again! Even more curiously nudging investment towards growth sector by governments is not considered a taboo anymore. Will wonders never cease? Inconclusionitisimperativethatthe governmentutilizesthenation’ssavingsin projectsofnationalimportance,whichare necessaryforeconomicgrowth,creationof employmentandexportsubstitution;even,if required,throughprovisionofcheapercredit. Unlesstherealeconomythrives,prosperity withinthefinancialsectorwillremainatriskand willlargelybeamirage. Ahealthybankingsectorandahealthyindustrial sectorarebothequallyimportant. SyedBakhtiyarKazmi The writer is a Chartered Accountant based in Islamabad.
- 18. 18 / BankingReview 2013 Savingmortgagefinance Home ownership is often used as a proxy for achieving prosperity like that in the US. While living an American dream might not be a priority for Pakistanis, owning a house is a major component of social infrastructure in the country. Theneedforahousingpolicyisquiteapparent givenitssocio-economicbenefitsanditsimpact ontherealsectorandtherebyonmacro- economicvariables.Cognizantofthisfact,the StateBankofPakistanhastimeandagainalso emphasizeditsfiscalbenefitsforthegovernment. Yet the country continues to face a dearth of housing units especially for low and middle income groups. Today, with a rising population, the country is fraught with limited access to housing and mortgage loans characterised by absent long-term finance and property rights. The underdeveloped house finance market contributes less than one percent to the country’s GDP as per the latest available SBP data, while elsewhere in the world, mortgage loans make up a sizeable chunk of the economic output. Take for instance India,which is way ahead when it comes to financial maturity. Not only is house finance a priority sector in India due to rapid urbanisation and economic growth, mortgages are also the largest components of its banking sector’s retail side. Amajor growth driver for housefinancein the South Asiangoliath is its National Housing Bank; the regulatory body provides institutional frameworkand long term loans to low and middle incomesegments. Though, House BuildingFinanceCompany is onespecialized housingbank in Pakistan with amandateto provide loans lower-middleand alow-income group,itssharein total housefinancehas reducedin absoluteterms over theyears. House finance hasbecomeexpensivein Pakistan and is stillrestricted to higher-incomepopulations. Challenges One could easily overestimate the maturity of mortgage lending in the country after going through the strategic goals for house finance by the Infrastructure and Housing Finance Department of SBP. The reality is still far behind from what’s on paper. Of the major challenges that shroud the domestic mortgage based financing, experts speak of the lack of a regulatory framework, absence of secondary mortgage market and long-term fixed interest rates as the prime ones. Also,the reluctancein mortgagelending by the bankingsector is dueto poor tenancy, possessionand foreclosurelaws and weak enforcement. This can indeed beseen from the decliningtrend in real estateexposureby the banks in thetotal credit to thenon-government sector. Theaverageannual cumulativereal estateexposureof thebanking sectorhas toppled from an already miniscule5.6percentin CY08 to adreary 3.9 percent in CY13. Then, of course, theunprecedentedrisein property prices, driven primarily bytherising demand, cost of land and constructionmaterial, urbanisation and speculativeactivity inreal estate, has continued to impair affordability for thoseseeking housing. This has adversely impacted themortgagefinancinginthecountry. Experts reckon that when it comes to financing solutions for the middle and low income segments, the awareness and acceptability of the products are marred by mistrust and uncertainty. And let’s not forget, the acceptability of an interest-based financial system has been a restricting factor for the conventional banking industry. Islamicbankingindustrycantaketheleadhere, especiallyinthesignificantlyuntappedlower- middleclasssegment,whichisindireneedof shelter.Already,Islamicbankinghasmadestrides intothemortgagemarketwitharound25percent shareinthecountry’shousefinance. According to theSBP data, theformal financial sector accounts for onlyonetotwo percent of total housing transactionsinthe country, whiletheinformal lending catersto around 10 to 12percent of thetotal.Whereas, therest of thehousing financeis arranged through personal resources, showingatiny shareof mortgage-based lending inthecountry. What needs to be done? First things first, market oriented housing reforms are the need of the hour. Though, the law for property registration and transfers exists, inefficiencies within the system make the process cumbersome.The key lies in strengthening the institutional framework which includes land administrative procedures, property titling and legal provisions. Improvement in house finance is also contingent upon the introduction and enforcement of foreclosure laws to ensure effective recovery of loans from the defaulters. Also, introducing new housing development and finance-related products is mandatory that caters to the needs of the neglected: the middle and low income segment. While the recent cap on real estate exposure by SBP might be seen as a restrictive attempt by some, others call it secondary to the main challenges like the lack of foreclosure and tenancy laws. The argument holds weight as it will take some time for the financial sectors’ exposure in mortgage financing to shoot from a dismal three percent to 10 percent. However, reformist attempts are crucial especially after the apex court‘s decision to strike down Section 15 of the Financial Institutions Ordinance 2001, which empow- ered financial institutions to sell mortgaged property without recourse to the court. Though a step in the right direction that gave lenders undue power over the borrowers, experts also fear the decision will not only increase banks’ resistance to extend mortgage loans but also make them hold back lending to private businesses in future. Allinall,theworktosalvagehousefinance shouldpickupimmediatelybyimprovingthe regulatoryenvironment,beforetherisinginterest ratescenarioandrisingpropertypricesdoaway withwhat’sleftofmortgage-basedlending. SidraFarrukh Source: SBP, House Finance Review 2005-11 80% 86% India China Korea 1% 2% 3% 7% 12% 17% 26% 29% 32% 41% Mortgageasa percentageof GDP Pakistan Indonesia Bangladesh Thailand Malaysia Singapore Hong Kong USA UK Declining real estate exposure in total credit to non-govt sector Total Credit to Non Govt.Sector (LHS) Share of Real estate exposure (RHS) Source: SBP, Economic Data 1% 2% 3% 4% 5% 6% 7% 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Rs(bn) Jun 06 Feb 07 Oct 07 Oct 09 Oct 11 Oct 13 Jun 08 Jun 09 Jun 12 Feb 09 Feb 11 Feb 13 Thewriterworksas ResearchAnalystat BusinessRecorder. Shecanbereachedat sidra.farrukh@br-mail.com
- 20. 900 2,100 3,300 4,500 5,700 6,900 50% 55% 60% 65% 70% CY08 CY09 CY10CY11 CY12 Jun-13 Rs(bn) Improving CASA Deposits (RHS) CASA 20 25 30 35 40 130 150 170 190 210 CY08 CY09 CY10 CY11 CY12 Jun-13 (mn)Rs('000) Average deposit per bank account No. of bank accounts Average deposit size (L.H.S) 30% 41% 1% 27% 0.25% Current accounts Saving deposits Call deposits Fixed deposits Other deposit accounts Deposit mix 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Rs(bn) Breakup of Industry deposits by account type Current accounts Saving deposits Call deposits Fixed deposits Other deposit accounts CY08 CY10 CY11 CY12 Jun-13 CY09 4,000 5,000 6,000 7,000 8,000 9,000 10,000 20% 30% 40% 50% 60% 70% 80% CY08 CY09 CY10 CY11 CY12 Sep-13 Rs(bn) Banking sector assets growing in favour of investments Total assets (R.H.S) IDR ADR Segment-wise advances & infection ratio (Sep-13) Staff loans Corporate sector Consumer financeAgriculture SME Commodity finance 0% 15% 30% 45% 60% 75% 90% 105% Top 5 banks 6-10 banks 11-20 banks 21-28 banks Foreign Banks Specialized Banks Lending split of different banking tiers (Sep-13) Top-10sectors(intermsoflending)&theirinfectionratio(Sep-13) 20 / Banking Review 2013 Corporate SME Agriculture Consumer finanace Commodity financeStaff loans 0% 10% 20% 30% 40% 50% 0 500 1000 1500 2000 2500 3000 Advances Rs(bn) Infectionratio Agriculture Transportation Cement ChemicalsFinancial Individuals Energy Electronic Sugar Textile 0% 10% 20% 30% 40% 50% 0 100 200 300 400 500 600 700 800 Advances Rs(bn) Infectionratio
- 21. 400 550 700 850 Breakupof industry depositsby depositor type (June-13) Foreign constituents Government Non-financial PSEs NBFCs Prviatesector enterprises Trust funds & non-profit organizations Personal Others 3,000 3,200 3,400 3,600 3,800 4,000 9% 11% 13% 15% 17% 19% CY08 CY09 CY10 CY11 CY12 Sep-13 Rs(bn) Industry infection ratio Advances (R.H.S) Infection ratio 150 250 350 450 550 650 CY08 CY09 CY10 CY11 CY12 Sep-13 Rs(bn) NPLs Loan Coverage NPLs and coverage 0 5 10 15 20 25 30 35 CY08 CY09 CY10 CY11 CY12 Sep-13 % Category-wise NPLs to total loans Public sector commercial banks Local private banks Foreign banks Specialized banks Category-wise coverage ratio 45 55 65 75 85 95 105 CY08 CY09 CY10 CY11 CY12 Sep-13 % Public sector commercial banks Local private banks Foreign banks Specialized banks 4% 5% 6% 7% 8% 9% 10% 200 350 500 650 800 950 1100 CY08 CY09 CY10 CY11 CY12 Sep-13 Rs(bn) Islamic banking growth Islamic industry assets (L.H.S) Share in banking industry Financing mix of Islamic banking industry Musharaka Mudaraba Istisna Ijarah Salam Murabaha Diminishing Musharaka Others Islamic banking infection ratio 2% 6% 10% 14% 18% 22% CY08 CY09 CY10 CY11 CY12 Sep-13 Infection ratio-Islamic banking Infection ratio-industry (6) (3) 0 3 6 9 12 15 18 CY08 CY09 CY10 CY11 CY12 Sep-13 Category-wise ROE Public sector commercial banks Local private banks Foreign banks Category-wise ROA (0.5) 0.0 0.5 1.0 1.5 2.0 CY08 CY09 CY10 CY11 CY12 Sep-13 % Public sector commercial banks Foreign banks Local private banksSpecialized banks 1000 1150 CY08 CY09 CY10 CY11 CY12 Sep-13 300 400 500 600 700 Rs(mn) No. of branches (L.H.S) Average deposit per branch Islamic branch network 21 / Banking Review 2013
- 22. 143.53 (Rs. mn)99.97 (Rs. mn) 97.92 (Rs. mn) 83.16 (Rs. mn) 82.13 (Rs. mn) Top5BanksintermsofCEOremuneration(Data based on annual reports -2012) 15% 20% 25% 30% 35% 40% 45% 50% KASB BOP NIB Summit Askari Bankswiththehighestinfectionratio 2% 5% 8% 11% BIPL MEBL BAFL ABL BAHL Bankswiththelowestinfectionratio Industryaverageof listedcommercialbanks (As of Sep-13) ADR 52% IDR 51% Infection ratio 16% Coverage ratio 79% CASA 59% Spread ratio 38% Non-funded income to total income 15% Saving deposit to total deposit ratio 34% 60% 65% 70% 75% 80% 85% 90% MCB HBL BAFL BAHL AKBL Top5banksintermsofCASA (As of Sep'13) 40% 50% 60% 70% 80% NIB Silk Bank Faysal Bank Samba NBP Top5banksintermsofADR(As of Sep'13) 40% 55% 70% 85% 100% 115% 130% Samba MCB MEBL BAHL JS Top5 banks intermsofIDR(As of Sep'13) 35% 40% 45% 50% 55% 60% 65% SCB MCB UBL Top5 banksintermsofspreadratio HBLMEBL 80% 100% 120% 140% 160% 180% NBP ABL BAHL MEBL SAMBA Bankswiththehighestcoverageratio 22 / Banking Review 2013
- 23. MeezanBankCEO anticipatesalargershareofpie Irfan Siddiqui isthe founding President & CEO of Meezan Bank Ltd. He initiated the forma- tion of Al-Meezan Investment Bank in 1997, which was converted into a full-fledged sched- uled Islamic commercial bank in May 2002. This was the first ever license to be given for Islamic commercial banking in Pakistan. Meezan Bank is now the largest Islamic commercial bank in Pakistan with 351 branches spread across 103 cities. Siddiqui is a Chartered Accountant from England & Wales and has extensive financial sector experience with Abu Dhabi Investment Authority, Abu Dhabi Investment Company, Kuwait Investment Authority and Pakistan Kuwait Investment Company. Irfan Siddiqui Founding President and Chief Executive Officer, Meezan Bank Ltd. BR Research: Take us through the journey of Meezan Bank so far. Irfan Siddiqui: Meezan Bank was launched in 1997 as an Islamic investment bank, and the first three years of its life were as an investment bank. We got the opportunity to venture into commercial banking through acquisition of Societe Generale’s operations in Pakistan back in 2002. From that point we have grown from just one small office in 2002 with a staff of 30, to over 350 branches in more than 100 cities across the country now. The response from the market has been very positive. It is a combination of what we offer to our customers and their receptive- ness. Ten to fifteen percent of the popula- tion will always be die hard Islamic banking customers and there would be another 10 percent who might not be. This leaves you with the remaining 80 percent. If you provide them the right service, pricing and environment, there is no reason why they should not come. We call them as ‘why-nots’, that if you offer them a good Islamic package, they will come to Islamic banking. Just labelling your product would not help, as people are well aware in the market. Offering a truly Shariah-compliant product is a must for the Islamic banking model to be sustainable. BRR: Did you have to create the demand among the ‘why-nots’? IS: You must make conscientious efforts to market your products. The product positioning and availability are critical for achieving success and that is what Meezan Bank has done. An edge that Meezan has in the market is that we deliver what we promise, not only in terms of product but the overall environment as well. Deep inside their hearts people have to be convinced on what they are working for. BRR: With a lot of conventional banks growing their share in the Shariah- compliant segment, how does Meezan manage to differentiate from the pack? IS: We have never conscientiously tried to differentiate ourselves – our aim and wish is that the market should grow. We have never seen other Islamic banks or windows as direct competition to Meezan Bank. Instead, we work with them and support them; we share good assets with our peer Islamic banks, which is how the market will gain depth and growth. The differentiating factor is up to the consumer; we grow as the industry grows. For some it would be pricing, for others it would be accessibility or environment – it all depends on the consumer. We would never advertise saying how we are different from other Islamic banks. BRR: Does the whole industry have a similar set of principles and guidelines? IS: We have the same regulator and the SBP Shariah board on the macro level. Within that, every individual bank has its own Shariah board, all pre-approved by the State Bank of Pakistan. There are minor differences of interpretation – not a matter of right or wrong - and it does not impact the Shariah compliance of Islamic banks. BRR: Critics say that a lot more needs to be done to make the system fully Shariah compliant. What’s your view on that? IS: On the question of Shariah compli- ance, I can safely say that we are 100 percent Shariah-compliant. Whether we can do even better is another thing and yes there are areas in which we can get even better, but that does not take anything away from our compliance. BRR: Is our model any different from the Malaysian model in terms of compliance strictness? IS: The Malaysian model has some difference, but by and large everybody in the industry is following the compliance guidelines to a good extent. The industry is moving in uniformity; the latest example is our recent advertising campaign, that was released from one platform which included the State Bank and all Islamic banks and windows. It is in the interest of all the players in a comparatively new industry to go hand in hand as we fully realise that we cannot move on to the next level in isolation. You need to have a critical mass and Meezan Bank provides that to the industry as the industry leader. BRR: Why is the penetration still quite low in Pakistan despite having such a massive Muslim population? IS: The industry started very late and the performance has been satisfactory in my view. We are 10 percent of the industry right now, which is commendable, given that this is a new industry in the Pakistani financial sector. And I believe that the next 10 percent growth would be comparatively much quicker. I see the Islamic banking industry growing at double the pace of conventional banking for a good five to seven years. Interview by Zuhair Abbasi and Sobia Saleem I see the Islamic banking industry growing at double the pace of conventional banking for a good five to seven years. 23 / Banking Review 2013
- 24. Money that prays Beforejoining Burj Bank as its President and CEO, Ahmed Khizer Khan worked as Chief Operating Officer of ICD (Islamic Corporation for Development of the Private Sector), Jeddah. ICD is one of the two main sponsors of Burj Bank and is a group company of Islamic Development Bank (IDB), Jeddah. Prior to joining ICD, Khizer was the Chief Executive of Barclays Global Retail and Commer- cial Banking, the UAE from 2006 to 2010. He was associated with Citigroup from 1997 to 2006 in various senior level assignments including Country Business Manager, Pakistan and Managing Director Operations and Technology, Central Europe. In this interview Khizer talks about future and potential of Islamic banking and challenges thereof. He also sheds light on how the pegging of minimum deposit rate can trigger private sector credit off- take. Ahmed KhizerKhan Chief Executive Officer, Burj Bank BR Research: Despite being one of the largest Muslim majority countries, the penetration of Islamic banking in Pakistan is still low. Is the environment not condu- cive enough? Ahmed Khizer Khan: In Pakistan, Islamic banking penetration stands at about 10 percent in terms of overall deposits of the industry. Considering that it has only been 11 years since the re-launch of Islamic banking, this percentage reflects an unparalleled growth trajectory. While the market shares of Islamic banking in other Muslim countries like Kuwait, Malaysia, Saudi Arabia and the UAE are much higher, these markets are much more mature in terms of the tenure of Islamic finance. It would be safe to conclude that the growth of Islamic banking in Pakistan has been exceptional. It is also important to note that the overall penetration of banking is low in our country whereby till date the banking sector has only been able to tap roughly 20 million customers. BRR: What’s the market potential? AKK: It is enormous. According to our analysis, an untapped banking market of over 40 million customers still exists within the country. Islamic banks in Pakistan are presently in their evolution phase thus providing enormous potential to grow this market. BRR: So then what is preventing the industry from realising this potential? AKK: Currently, the greatest challenge to growth is the awareness gap and the central bank has taken some very significant steps in this regard including a mass media awareness campaign launched this year. However, Islamic banks must also contribute at their own level towards this awareness drive by conducting micro marketing initiatives, seminars and mass communication campaigns which promote the values and supremacy of the Islamic financial system. The second greatest challenge facing the industry is the human capital gap. The SBP is playing a pivotal role in this regard with NIBAF (National Institute of Banking & Finance) being at the forefront of these initiatives. Given the dynamics and psychographics of our consumers, Islamic banking has the potential to become the system of choice within the country. With the commitment of our regulators, I have no doubt that this will be made possible in times to come. BRR: Islamic banks face problems in asset creation and liquidity management due to a lack of short-term Islamic instruments offered by the government. How is Burj Bank tackling the maturity gap? AKK: Due to lack of Islamic Instruments for liquidity management and an under- developed Islamic finance market, Islamic banks are facing some problems in managing liquidity. An under-developed money market as well as limitations in money market instruments are also major constraints towards the liquidity manage- ment process. Having said that Burj Bank is efficiently managing liquidity with greater reliance on interbank placements through Mudaraba, Musharakah and Wakalah with Islamic banks and through commodity Murabaha with conventional banks. BRR: Islamic banking is limited in its ability to offer personal finance. How are the Islamic banks battling against that? AKK: Since Shariah is the basis of Islamic banking, therefore, Islamic banks cannot lend money or price money because it is Riba and that is prohibited as per Shariah. Instead of lending money or offering working capital financing, Burj Bank finances the need of the customer in the form of commodities, goods or assets. For example, if the customer requires working capital for raw material purchases, Burj Bank offers Murabaha financing (cost plus profit sale). Similarly, if the customer is a manufacturer and it requires financing to manufacture goods, Istisna is offered to them. Recently Burj Bank has also launched a structured financing product for the service sector, Service Ijarah and a working capital financing product for finished goods called SAHL. BRR: Islamic banks are privileged in terms of not having a floor on saving deposits. Besides, asset-backed financing also curbs NPLs. How are the Islamic banks leveraging these factors to be better than the conventional banks? AKK: It has surely helped Islamic banks in providing actual rate of returns to the customer but at the same time it has created a new challenge of providing competitive rates to saving depositors while managing the liquidity issue. Since Islamic banks finance the need of customers instead of lending money, therefore all the transactions of Islamic banks are backed by assets. This is the primary differentiator which makes Islamic Banking superior, balanced and more secure in comparison to conventional banking. The recent global financial crisis has proved this point. An IMF study conducted in the aftermath of the reces- sion compared the performance of Islamic banks and conventional banks during the financial crisis, and found that Islamic banks, showed stronger resilience during the global financial crisis. According to the report, Islamic banks worldwide performed better than conven- tional ones in terms of profitability, credit and asset growth. The profitability crunch of Islamic banks worldwide was less than 10 percent, whereas the profitability of conventional banks slumped by more than 35 percent. BRR: Will the pegging of minimum deposit rate with discount rate trigger private sector lending? How will the banks combat spread shrinkage? AKK: It is most likely to generate private sector lending. To counter the impact on spreads, banks will now move to more lucrative avenues, which include penetra- tion in consumer segments. Besides, product innovation keeping in view the revision of Prudential Regulations by SBP for small and medium enterprises, may also attract program lending to small enterprises, which offer better returns. Though, there is a possibility that private sector off-take will improve but corre- sponding increase in economic activity is also pivotal to make the risk taking worthwhile. Banks may continue to shy away from assuming risk until the private sector demand remains depressed and pressing issues like energy crises continue to dent the economic activity. Interview by Zuhair Abbasi & Sobia Saleem 24 / Banking Review 2013
- 25. Schooldays generally startfor children by the time they are 4-5 years old. But it seems that Pakistan’s 5-year old branchless banking (BB) sector is itself schooling the developing world on how it’s done. Global financial institutions consider Pakistan as a BB innovation laboratory, while private philanthro- pists are keen on the socioeconomic spillovers. Five years after the State Bank of Pakistan (SBP) issued detailed BB regulations – a first in South Asia – the non-existent market base has now grown to 7 service providers (more pilots are underway) and over 100,000 retail agents. As of September last year, the sector was handling transactions worth nearly $25 million a day or over $700 million a month! All the mobile network operators are now deeply involved, as are some of the leading commercial banks. Those currently not in the mix also seem interested – some are dipping their toes by partnering with existing players, while the rest of the fence-sitters are finding it hard to ignore this sector any longer. This special BB feature – which is an acknowledgment of the promise this sector holds to bridge the gaping financial divide, also an accolade to the SBP’s enabling and proactive role – intends to highlight the sectoral performance with a forward-looking agenda. Readers will find pictorials that describe this growth story over the years. Then there are market insights on key learning and challenges, for which BR Research interviewed three individuals who have led BB deployments in their respective organisa- tions right from the start. Due to space constraints, we could include these insights from the top 3 BB service providers (based on SBP’s market shares as of September, 2013). BR Research appreciates the divergent perspectives (especially the telco-bank divide and the financial inclusion vs. financial access debate) on how best to mainstream the financially excluded population. We are witnessing a growing private sector appetite in this sector, which is a good omen for increasing the coverage and usage of financial services in the country. Key Learnings Even simple financial services make a huge difference in the lives of people. This is evident from the customers we interact with and the stories we get to hear. But people want more than just transactional services. That is why Easypaisa is the first BB service in Pakistan to venture into more than just transactional services with products like Khushaal Beema, Khushaal Munafa and ATM Cards. Another key learning is that apart from convenience and reliability, security is also very impor- tant to the customer. There is still a huge untapped need for more convenient and more accessible financial services, especially at the bottom of the pyramid or those we call ‘un-banked’ or ‘under-banked’. We estimate a total of 60 million users who have a need to use branchless banking services and Easypaisa is only serving 6 million every month. Challenges One of the main challenges we face is that the regulatory requirements for BB accounts are not attractive to move customers over from over-the-counter (OTC) services. Not all customers carry their Nadra CNICs at all the times. Moreo- ver, verifications from Nadra on important transactions are often expensive. Collect- ing an image of the customer, an image of the CNIC and a physical visit to an agent location are restrictive. SBP can revise the BB regulations to introduce a true ‘entry level’ account for customers who can sign-up easily. Account limits also need to be revised to provide an incentive to customers to migrate to BB accounts. There is a great need to digitise payments, especially the G2P and P2G payments, which are typically held in monopoly between a few banks and force customers to inconvenient, time- consuming options of payments. Anybody would know the difficulty one faces to pay for a traffic challan or a Nadra CNIC card fee at a NBP branch. CustomerpreferenceforOTCtransactions… There are literally no barriers to using OTC services. Customers can simply walk up to the agent and carry out a transaction in a few minutes. There is no sign-up required and the entire transaction is merchant- assisted. Even with low literacy levels, customers don’t have to do anything but go to their nearest agent with their CNICs. There has to be a greater focus on BB accounts by the players. At the moment, with so many new players coming into the market in the last 15 months, most of them are focused on fighting over existing agents and setting up their OTC transac- tions, with some not even promoting their BB accounts. However, BB players currently incur a heavy cost in opening each BB account. There are commissions to pay and Nadra verification charges (amongst other costs), which are almost twice as much is charged to other commercial banks. The revenue from a BB account is so low that it often takes the payback period up to a year on the initial account opening costs. So it’s imperative to reduce these costs. Customers need to be offered more than money transfer and bill payment services on their BB accounts. Since these services are available on OTC as well, the BB accounts must provide more value to customers. Payments, savings, lending and other advanced financial products are much-needed. Promoting Mobile Wallets All BB players need to realise that operat- ing behind walled gardens will not work out in the long run. There is a need to integrate and connect with the existing infrastructure. For example, Easypaisa has taken the lead to connect with 1-Link. We now offer ATM cards to our customers which can be used for cash withdrawal at any ATM machine in Pakistan. There is also a need to provide Retail Payments, for which Easypaisa has already rolled out a service where BB accounthold- ers can purchase items directly from their BB accounts from any Easypaisa agent location. But the current processes are seen as cumbersome and time-consuming, so there is a continuous need to keep attempt- ing better solutions for retail purchase. On Omni’s four-year journey so far… UBL Omni’s four-year journey is just the beginning of providing affordable basic financial services to the masses via BB services, i.e. via retail outlets. There is a huge demand for BB services by consum- ers who need to send money, receive money, pay their bills and keep their savings secure yet readily available for use. A key learning is that the industry needs to continue to increase awareness and promote usage of these services to more fully realise the potential of these services. Another key learning is that consumers have repeatedly exhibited their willingness to try new products and services. This trend has been observed in both rural and urban markets. UBL Omni’s experience with the G2P payments projects for the poor and underprivileged that reside mainly in remote rural areas, demonstrated that those people were equally keen as their urban counterparts in learning the usage of BB channels. Due to this, the industry has many opportunities to take new products for consumer trial. A few myths need to be debunked, as well. Unlike general perception, there is no definite urban-sender, rural-receiver pattern out there, for rural areas are also the origins of BB transactions and lots of small cities are also generating good volumes. Another myth is that people are sending money back home for monthly expenses. That is not entirely true. Through this platform, people are sending money to their kids; companies are disbursing salaries to their employees; people on daily wages are being paid, etc. So, there are a variety of funding needs that are being effectively served through this channel. Challenges for a solo service provider like Omni UBL Omni has a telco-agnostic business model, which means that the Omni users have the freedom and flexibility to choose the mobile service provider that best meets their needs in terms of service, price and location. BRANCHLESSBANKING SECTION OmarMoeenMalik, Head of Strategy, Easypaisa Omar has been part of the core Telenor Easypaisa team since before its launch in 2009. Prior to his 3-year experience in Mobile Financial Services, he gathered over 4 years of GSM experience with Telenor where he headed the Value Added Services department. Omar holds a B.Sc. in Computer Sciences from the University of Texas at Austin and an MBA from LUMS. Abrar has led the UBL Omni’s retail distribution network development since the start. He has also led the development and ongoing improvements in an in-house technology platform that enabled the multichannel transaction capabilities for Omni customers. Abrar holds a bachelor's degree in Electronics Engineering from UET, Lahore and an MBA from the Illinois Institute of Technology, Chicago. AbrarA.Mir|Group Head and EVP, Branchless & e-banking, United Bank Limited Continued on next page 25 / Banking Review 2013
- 26. - 10 20 30 40 50 60 - 50 100 150 200 250 1QFY12 2QFY12 3QFY124QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Branchlessbanking transaction mix Value Rs (bn) Volume (mn) - 20,000 40,000 60,000 80,000 100,000 120,000 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Numberofagents 1,492,639 1,028,775 26,897 94,630 Level 0 Level 1 Level 2 Level 3 CompositionofBBaccounts(as of June 30, 2013) - 0.5 1 1.5 2 2.5 3 3.5 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Numberofaccounts(mn) - 500 1,000 1,500 2,000 2,500 3,000 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 DepositsRs (mn) 7 15 33 41 31 38 26 34 Rural Urban Adultswith anaccount ataformalfinancialinstitution(%) Pakistan India South Asia Lower Middle Income (countries’ average) - 50 100 150 200 250 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Total Loan repayment, bulk payments and others Bill Payments & Top-ups Deposits & Withdrawals Funds Transfer ValueoftransactionsRs(bn) 17 3 44 26 41 25 34 23 Male Female Adultswithanaccountataformalfinancialinstitution(%) Pakistan India South Asia Lower Middle Income (countries’ average) - 5 10 15 20 25 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Numberoftransactions(mn) Bill Payments & Top-ups Deposits & Withdrawals Loan repayment, bulk payments and others Funds Transfer OTCvolume mix (Jul-Sep 2013) P2P Fund Transfer G2P Pensions and salaries Withdrawal through G2P Cards Bills payment and Mobile top-ups Loan repayments and others M-walletvolume mix (Jul-Sep 2013) Fund Transfer G2P Pensions and salaries Cash Deposit in MW Cash withdrawal from MW Bills payment and Mobile top-ups Sources: SBP quarterly newsletters on Branchless Banking | Global Findex Database 26 / Banking Review 2013
- 27. The original concernsthat many people had were around UBL’s capability and capacity to build a retail agent distribution structure as compared to the perceived advantage of the telco service providers who already had a massive distribution footprint. However, selling financial services is a different line of business and requires a different level of retailer engagement. As a full-services bank, UBL was aware of the level of engagement required to ensure the provision of quality banking services delivery from agent locations, which only comes through retailer training and education. Today, the industry with 6-7 active service providers boasts a sum total agent network of over 100,000 retailers, but a probable estimate of unique outlets is just 30,000 to 35,000. Meanwhile, Omni is available at over 15,000 active locations and continues to grow its market share. The key challenges that we face are sector-related, which are common to all service providers. They include expanding the agent network, creating customer awareness, and enriching the customer experience. Being part of a large commer- cial bank has provided numerous benefits. We were very particular about our internal controls, risk management, and product definition right from the very beginning. That has enabled us to run the business in a very controlled manner with an emphasis on consumer service quality. OTC: An unforeseen trap… Currently, the market is dominated by the OTC money transfer business, which does not offer the same features of BB account services, such as higher transaction limits, instantaneous ATM/Debit card issuance from retail outlets, usage of countrywide ATMs, mobile and SMS transaction functionality and lower charges than OTC. Thus, there is an unrealised opportunity for consumers to benefit tremendously by using BB accounts. In the last 2 years, UBL Omni has been aggressively promoting account proposition in its advertising, customer communication and investment in account product innovations. Unfortunately, we as an industry have fallen into a short-term revenue generation trap whereby we have made our business models OTC-centric at the expense of accounts’ growth, the cost savings, customer convenience and the long-term benefits to industry. I am sure as the business models mature, as consumers become more demanding, and as new products are rolled out, the market will move away from being predominantly OTC-centric. The way forward… The future is extremely exciting and offers huge opportunities to transform the retail, G2P, B2B and C2B payments in Pakistan.” We are fortunate to have SBP as our regulator in that they are extremely forward-looking and work very closely with the industry to support the evolution of new business models around this structure. However, one of the most critical enablers for that revolution to happen will be widespread availability of retail agent locations that are providing these services to customers across Pakistan. It is about time that the industry agreed on a code of conduct whereby the service providers refrain from signing the same shared agents. The industry needs to work towards expanding the agent base, maybe with selected geographies and interoper- able networks. Multiple sharing of agents results in liquidity and management challenges at the retail location which ultimately can translate into a poor customer service. Waseela’s year-long experiences A year after operations, our basic assump- tion – that there is a large market of unserved people for sending and receiving money, paying utility bills, etc. – stands validated. Currently, Mobicash is handling 1 million transactions a month (mostly urban-to-rural domestic transfers) worth a total of Rs4 billion in transaction value. The number of BB customers and volumes have been picking up rapidly. We are confident that in the long run, the growth rate will be even faster as we’ll be able to use the synergies with Mobilink and promote the usage of mobile wallets (or m-wallets). Our target market is those 100 million+ individuals who have a cell phone but no bank account. We understand that bringing them on board is the first step, which has to be followed by the broaden- ing of services menu. The channel is new and therefore cannot handle very sophisti- cated financial products at this time. It’s a big market, and more number of players will help the market in expanding its outreach. After mobile operators, commercial banks are also trying their hand in this sector. It will be interesting to see the competition in the sector. We also understand the importance of expanding our microfinance footprint as much as our branchless banking network. We have been able to position ourselves in core micro business of small deposits and micro loans. The microfinance bank is firmly established, with about 30 fully-functional branches, 5000 individual borrowers and Rs180 million in loan portfolio. Challenges facing Mobicash One of the main challenges is to manage the large number of agents. Mobicash has about 27,000 retail agents located all over the country, a footprint we are targeting to expand to 40,000 locations by the end of this year. Now these outlets are the simplest possible versions of bank branches, but they are absolutely new to the world of financial business. It’s a challenge for all the market players to adequately train their agents to comply with the BB regulations for functions like money management and KYC, as well as for consumer aspects like speed, quality and delivery of the service. Currently, we are catching up in terms of building capacity and experience relative to our competitors. Ultimately, it’s the people that make the difference and drive business. We are trying to keep the best possible people in this venture. In terms of business, in five years’ time, our ambition is to be the market leader, which requires us to find a way to surpass the challenges. The OTC dilemma is a hard one… Agents are well-educated in the process of registering m-wallets. But the dilemma is that if an agent puts efforts into registering m-wallet users (for which he is being incentivised), he starts losing his OTC- related commission and fees as the sending customer is enabled to perform transactions on his own instead of going to the agent. We need to find a way to surpass this challenge. Another issue is that customers are not aware of the benefits of usage of m-wallets. Similarly the fact that the OTC channel is neutral to both users and non-users of a particular service provider is also fueling its usage. In addition, receivers, which are found more on the rural side, have natural preference for OTC. The reality is that OTC is serving well in developing the market; it’s growing agent business; and it’s convenient for low-income end users. The SBP data shows that OTC uptake is increasing every quarter, which means that there is a need for it. Migration to m-wallets The m-wallet uptake is increasing, and the number of their subscribers now exceeds 2.8 million. But this number is small compared to the potential size of the market. A lot more consultation has to take place to promote m-wallet usage. The regulator and the industry are trying to encourage m-wallet usage. But there are several impediments, including agent incentivisation and customer awareness. On our part, our ads are particularly designed to make people aware of the benefits of m-wallets. We are also coming up with an ATM card for our m-wallet users to give them an added incentive like a bank account does. But this is a challenge for the entire industry and the regulator, because there are other issues involved here. There are many retailers who do not want to document their transactions, meaning they cannot partner with the BB service providers for payment settlement. It will take at least 5 years for a major shift towards m-wallet adoption. Market players would need to seriously invest more money in technology and awareness campaigns. Over in Bangladesh, there is a good usage of m-wallet, thanks to the 50 million+ customer base of microfinance banks. Therefore, growth of domestic microfinance sector will also help. BB services and the Payment Ecosystem It’s a question of connecting small and big retailers to this payment platform. The sooner outlets like small grocery stores and vegetable shops are able to settle their payments through this system; the better it will be for m-wallet usage. It’s also a question of education and time. People will get sensitised over time. We can take the cue from the adoption of debit cards in Pakistan. I foresee a time where any institution which will remain out of this payment platform will lose out. Continued from previous page Ghazanfar helped launch Waseela and Mobilink’s joint BB deployment, Mobicash in November 2012. He has previously served as the President and CEO of Kashf Microfinance Bank. He is an MBA from the University of Punjab, Lahore, and has attended executive education and leadership programmes at LUMS, Penn State University, and the Harvard Business School. GhazanfarAzzam President and CEO, Waseela Microfinance Bank Interviews by HammadHaider 27 / Banking Review 2013
- 28. 28 / BankingReview 2013 QasifShahidandShamsulhaqNiaz Improvingmobilebanking growthprospects Mobile Bank
- 29. Mobilebankingtakesbankingrelationshipto a wholenewlevel.Customersgetthe conveni- enceofbankingfromtheirhomes,while branchesenjoydecongestionastheyno longer needtoprocesslow-valuetransactionsandcan focusonbetterservicetohigh-value customers. Asmanyaselevencommercialbanksare currentlyofferingthisservice in Pakistan.The commercialbanksthatare notofferingmobile phonebankingareeitherinthe processof developingthechannelortheyare public sector banks.Otherbankssittingoutside the mobile phonebankingmarketaredoingso because theyarenichemarketplayerswhere the size and natureofthecustomerbase doesnotjustifya decentreturnoninvestmentor theyare simple notprofitableenough. Though still in its infancy, mobile phone banking continues to see a healthy quarterly growth. While the number of transactions from 1QFY11 to 1QFY14 has grown at a CAGR of 26 percent, the volume of transactions has grown at a CAGR of 99 percent. Partofthiscanbeexplainedbyinflation (particularlyinutilitybills),butitisalso likelythat consumershavegainedenough trustin the systemtocarryouthighervalue transactions throughthischannel.Accordingto the central bank’sPaymentSystemsReviewof1QFY14 transactionsunderthissegmentprimarilyfall intopaymentofutilitybillsandaccount-to- accountfundstransfer. Aside from these two factors there are three macro trends that are driving mobile banking in Pakistan. First,isthegrowinguseofsmartphonesand internetinthecountry.Smartphonepenetration isaround10percentwithfeaturephones comprising75percentofallphonesinthe country.Nowadaysvirtuallyeverynewphone beingsoldisasmartphone;Chinese smartphonesareavailableinthemarketoffering animpressivearrayoffeaturesforverylowprices. Becauseofsmartphones,internetconnectivityis alsofastbecomingawayoflifefortheordinary person.Mostupscaleormediumscale supermarket/restaurant/publicareaofferWi-Fi hotspots.Besides,3Gnetworktechnologyisalso expectedtoberolledoutthisyear.Soon,eventhe mostoutoftouchwillbebrought–voluntarilyor otherwise–intotheconnectivityfold. Thesecondfactoristhegrowingimportance ofAlternateDistributionChannels(ADCs)for commercialbanks.Thereisnodebateonthe valueofADCsinthebankingindustry.Bankswant tostayintouchwiththeircustomersasmuchas possibleinaday,whichiswhyovertheyears we’veseenbranchtimingsincreasedto5pm (endevenbeyond)from1pm.Similarly,theATM networkisspreadacrossthecountry.Moreso, brandeddebitcardshavenowbecomevirtuallya mandatoryrequirementforaccountholders. Thethirddriverhasbeentheintroductionof MobileFinancialServices(branchlessbanking)by mobilenetworkoperators(MNOs).Thereis alreadyaveryhighpenetrationofmobilephones inthepopulationandtheMNOsareseeking revenuegrowthfromthis‘Value-AddedService’. Theyhavemadephenomenalstridestoglobal acclaimandhaveblurredindustrylines.Nowany mobilephoneusercaneasilyopenabranchless accountwithhis/herserviceproviderwithout havingtofilloutlengthyformsandwaitafewdays. Theattentiontheyhavereceivedisdisquieting banksbecausetheyneedtooffersomething aboveandbeyondthebranchlessbankingmenu toconventionalbankingcustomers. Apayment ecosystem Currently,mobilebanking primarily provides relativelybasictransactions and facilities to the customers,such as balanceinquiry, onlinefunds transfer,mobiletop-ups and bill payments. Bill paymentsarelimited to utilities and cellular post-paidbills, and arepretty much similar for mostofthe banks. In thenear future, the direction we arelikely to seeis all theplayers attemptingto createpayment ecosystems to tryandring-fencetheir customers by keeping their moneywithin aclosed loop. An example couldbe of: “A bankofferssalary accountsto the employeesof a corporate clientA. These employeesreceive their salariesandspend themin variouswayssuchasusing their debit cards topay for groceriesata hypermarket which is also a corporate customer. Inturn, the hypermarketwouldpay itssupplier online which happensto be corporate clientA, thus completingthe loop.” To do that, atwo-pronged approach will be required.Firstly, alliances and loyalty programs shouldbe offered to theconsumer. Secondly, institutional solutions – including salary processing,cash management/collections, etc. –mustbe provided. At themoment, thenumber of onlinebillersis very limited becauseit is cumbersomeforbanks to bring each biller on board. Bringingthem onboard requires negotiations and draftinglegal agreements, which takes timein bureaucratic environments. Theway forward isthroughbilling aggregators – third parties which signupbulk billers and merchants and provideasingle interfaceto thebank whilehandlingthebackend processing. This is already happening,whichis why we’ll beseeing non-utility billingoptionson themenu such as train tickets, schoolfee payment and later on, maybeevengovernment payments such as trafficviolationfines,etc. DigitalWallets When MCB launched its mobilebankingservice in 2009, wewereoneof thefirst banksinthe industry. Till date, wehavehad over10million transactions worth morethan Rs40billion performed on our mobilebankingplatform.We haveused insights gained from ourexperiences to develop adigital wallet – therecently launched MCB Lite– in our bid to stayaheadof thecompetition in themobilepaymentsspace. Webelievedigital wallets arethenextbigthingin mobilepayments and will drivethe payments landscapeinto awholenew stratum.Traditional mobilebanking is encumbered bytheunderlying corebanking systems. A digital wallet,onthe other hand, offers endless possibilitiesfor innovation in payments solutions becauseit leverages mobiletechnology, socialconnectivity and thepower of cloud computing. Awarenessandfinancialliteracy Lack of awareness is really what iskeeping customers from using mobilebankingdespite thefact that alot of timeand moneycanbe saved through mobilebanking. Withtoday’s petrol prices, even asmall trip to thebank can cost morethan ahundred rupees,soanyone with theawareness would do themathand chooseto transact onlinegiven theopportunity. However, wedon’t feel this is goingtoremaina major issueas peoplearecatchingonfastand whichever banks can go out and educate consumers and offer thesimplestormost convenient solutions will bewell positionedto lead themarket. With smartphoneusageon therise,weexpect alot of players developing mobileappsfor mobilebanking. Such apps may offerimproved interfacesforcarryingouttransactionsand offeringvariousutilitiessuchasGPS-based loyaltyprograms,complaintlogging/tracking, directionstothenearestbranch/ATMthrough GPS,etc. Technologicallimitations Perhapsoneof thegreatestlimitationsforlack of innovativeproductsinmobilebankingis technologicalinnature,especiallyforbanks. Theirlegacy corebankingplatformsarerickety anddonotprovideflexibility orscalability.Itis verydifficultandexpensivetoupgradethemor toaddinnovativefeaturestothem.Thereisalso considerablecostinvolvedwithscalingupin termsof manpowerandinfrastructure. Bankscanlearnfromthetelecomindustryin Pakistanwhichhasdiscoveredthatitmakesmore economicsensetoshareinfrastructurewith competitors.Thepolicymakersmightbeableto enablesuchthinkingiftheyrelaxframeworksto allowcollaborationsuchasinfrastructuresharing. Thatwillrelievethebanksoftheburdenof continuouslyupgradingandmaintainingtheir infrastructureandtheywillactuallypaymore attentiontoinnovationanddesign. Despitetheselimitations,mobilebankinghas outpacedinternetbanking.Internetbankinghas beenaroundsince2003,butmobilebanking, whichwasintroducedaround2009,alreadyhas moreregisteredusers(1.4 millionvs.1.3million). Thoughinternetbankingprovidesaricher experiencewithmorefeatures,thetrendis explainedby thefactthatitrequiresusersto haveemailaddresseswhilemobilebanking usersareregisteredthroughtheirphones. In the longer run, however, we feel that if banks can drive uptake of mobile banking successfully, this will create a second wave of internet banking. It is important that banks don’t try to price transactions on both channels, as this will do more harm than good – discouraging large scale uptake and not generating much income. 29 / Banking Review 2013 The writers are members of the Digital Banking team at MCB Bank Ltd. Mobile phone bank- ing continues to see healthy quarterly growth. While the number of transac- tions from 1QFY11 to 1QFY14 has grown at a CAGR of 26%, the volume of transac- tions has grown at a CAGR of 99%.
- 30. Barclays: Strategybydesign Shazad Dada joinedBarclays Bank Pakistan as the Chief Executive Officer in October 2010, with overall responsibility of managing all business operations in the region including corporate and retail banking. He started his banking career in the USA, joining Bankers Trust in 1990, which was acquired in 1999 by Deutsche Bank AG, before becoming Chief Country Officer and Head of Global Banking Deutsche Bank. Prior to taking up his role with Barclays, Shazad was a Managing Director in the Mergers, Acquisitions and Corporate Advisory Group at Deutsche Bank Securities. In this interview with BR Research Shazad, who is also the Chairman of Pakistan Banking Association, talks about the bank’s strategy to increase advances, the pegging of deposit rates to discount rate and his views on the draft Corporate Rehabilitation Act. ShazadDada Chief Executive Officer, Barclays Bank BR Research: What has been the overarch- ing theme behind Barclays Pakistan? Shazad Dada: Our clients and customers are at the center of what we do. Across our business, we are innovating and redesign- ing our services around them, while also reaping the benefits of greater efficiency and control. While this will be an ongoing process, some of the results are already apparent. If you look at the numbers, we had realignment in 2012, intending to refurbish and reshape our business, which certainly has yielded good dividends. We want to play our local and global strengths and become the ‘Go-To’ bank for multinational and large local corporations, financial institutions, high net-worth individuals and development organizations/foreign missions. The year 2013 was a testament to our value-driven strategy’s popularity where we continued to take market share and with the support of our clients, we have seen both our deposits and assets grow steadily. BRR: We have seen the administrative expenses coming down by Rs750 million; however, the topline seems to be suffering. Why is that so? SD: It’s by design. We have leveraged our products, capital, networks and expertise to drive sustainable progress; however, there were some clients who we cannot service effectively. We have to pick our ground in which to be competitive. We decided to let go of some clientele because of their domestic focus. Gener- ally, they do not have FX or cash manage- ment needs, so we took a revenue shortfall with the resulting greater cost reduction. By concentrating on targeted segments we are better able to provide a higher level of service, understand clients’ needs in greater depth and tailor products and solutions accordingly. Working with one large enterprise client on their financing solutions can lead us to provide similar but tailored solutions to other clients in the same sector. BRR: Do you plan on expanding your branch network? SD: Currently, we have no plans to expand our branch network. Our existing branches are state of the art in the design and geographically well placed to our targeted client needs with a capacity to scale up if required. Furthermore, making use of the technology we are working towards branchless banking covering geographies, which are required to service our target clients. BRR: Why have your advances stagnated? SD:Our overall advances are stagnated, compared to last year. However, if we go into details, the advances to our existing clients have actually increased. As I mentioned earlier, it is by design that we have exited some non-core relationship which caused a decline, but that was offset by an increase in advances to our target clients. BRR: Do you see your ADR getting higher than IDR anytime soon? SD: Mostly likely yes. Our clients are again in an expansionary mode and trade volumes are likely to be higher. Both of these key indicators suggest that our advances should increase in 2014. BRR: What are your views on opportunity for Pakistani businesses in Africa? SD: For many exporters Africa is the final frontier. The vast and diverse nature of the continent and its people makes trading with Africa seem simply too much of a challenge. However, the infrastructure across many of Africa’s largest economies is improving rapidly and I encourage all Pakistani businesses to view Africa as a fast growing new market to be explored. With more than 50,000 employees on the ground in Africa, we know very well the challenges that businesses face, but also the success stories of so many of our clients who have started business relations with African companies. This is the ‘ground floor’ for many African economies, in which Pakistani exporters have the opportunity to build their brand in Africa at a time when a growing middle class is beginning to make long term brand decisions. Pakistan should not be missing out. BRR: Being the Chairman of PBA, what are your views on the State Bank’s decision to peg deposit rate with discount rate? SD: By pegging the deposit rate to discount rate, the spreads have been fixed, with the result that banking sector cost of deposit has increased, however, varying between banks. The hardest hit category is basic saving accounts which are generally in Pakistan used as normal transaction accounts with all the features of checking accounts. Therefore by capping the saving account spreads and considering the cost associ- ated in servicing these accounts the deposits become very expensive. Personally, I believe banks should have the freedom to determine their own rates based on their cost structure and funding requirements. In a free market depositors should be the ultimate winners. BRR: Has there been any progress with the Corporate Rehabilitation Act after the recent meeting with the SECP? SD: The banking community is clearly in favour of enhancing the current law or enact a new law that provides interim relief to debtors in case of genuine challenges they may face in meeting their financial commitments. Having said that, we are also concerned if the act is not drafted properly, it will be misused by willful defaulters and cause an increase in NPLs. As for the draft of Corporate Rehabilitation Act, which was initiated in 2008, banks reviewed the draft individually, and through the platform of PBA proposed certain changes in the draft act. These suggestions are yet to be incorporated in the draft, and based on the recent feedback from all the stakeholders, it has been indicated that the SECP is reviewing the draft act afresh. Interview by Ali Khizar and Zuhair Abbasi 30 / Banking Review 2013
- 31. Citibank N.A. cautiously optimisticabout Pakistan Meet Nadeem Lodhi, who rejoined Citibank N.A Pakistan as its Country Manager and Managing Director in 2012. Prior to that, Nadeem was associated with Abraaj Capital where he was heading the business for sub-Saharan Africa. During his earlier tenure at Citi, Nadeem held various roles in Pakistan and Africa including the CEO for Uganda. Belowistheeditedtranscriptofarecentsit-downwithBRResearch. NadeemLodhi Country Manager and Managing Director, Citibank N.A. Nadeem kicks off the discussion by explaining the business strategy of the bank. “Globally, Citibank N.A. classifies its banking business into two major domains: consumer banking and institu- tional banking. The institutional business of the bank primarily comprises treasury & trade services, advisory & investment banking and corporate banking, which forms the core essence of Citi’s opera- tions worldwide.” He explains that the bank remains at the forefront of taking clients in Pakistan to international capital markets and introduc- ing new products from other geographies by adapting them to local needs. Recalling Citi’s feats, Nadeem says that “fundamentally, Citi Pakistan is now a wholesale bank serving its corporate and institutional clients – all their other offerings are designed to facilitate the delivery of services to such clients. Some of our most significant transactions include Government of Pakistan’s first foreign currency Sukuk, first local currency Sukuk, first oil hedge in Pakistan and so on. We have also been involved with the govern- ment as Joint Arranger on three Eurobond issues in 2005, 2006 and 2007 and the OGDCL GDR issue in 2005.” He emphasizes on how Citi’s business model is different from other banks operating in Pakistan and also explains the rationale behind the bank’s limited market presence - having just three corporate branches in the country. “Citi’s primary focus is to serve top tier Pakistani corporates and public sector entities as well as MNC clients present in various locations across the globe with heavy presence in the country. In Pakistan we are uniquely positioned with a well-entrenched franchise and continue to successfully deliver value-added solutions to this niche client base from areas of structured financing, M&A advisory, electronic payment solutions, export credit agency supported financing, working capital management and risk management. Just to give you an example, we handle over 50 percent of the total MNC trade volume in the country,” he said. Some of the most recent and significant achievements of Citi include, jointly arranging $130 million syndicated foreign currency Islamic facility for Pakistan International Airline (PIA) in October 2013 which was the second biggest transaction in the last 2 years. The bank also arranged $70 million FMO & OPIC supported financing for Pakistan Mobile Communica- tion Limited (Mobilink) in 2012. On the investment banking front, the bank holds a leading position in the market. “We’ve recently advised Unilever on share buy-back of Unilever Pakistan and delisting from the Pakistani exchanges which contributed to be the single largest FDI in the recent history of Pakistan. The bank also advised on AkzoNobel's sale of its controlling stake in ICI Pakistan, and acquisition of 35 percent stake of Pakistan International Container Terminal by ICTSI.” Among all the categories of institutional banking, Lodhi terms trade and cash business to be the anchor of the bank’s business and the single most important area that pours in flow into the bank, while on the treasury front, Citi also provides hedging and derivative to its clients besides FX sales. As part of its commitment to the country, Citibank N.A. has been conduct- ing road shows since last year to show- case the potential of the Pakistani market. In collaboration with the US State Depart- ment, the bank also hosted an investment conference in Dubai in June last year, providing an opportunity to Pakistani companies to highlight the multiple opportunities available in the country to US investors. The bank is already Basel-III compliant while other banks are likely to achieve the same level in 2018, as per the plan chalked out by the regulator. Further- more, Citi is pioneering efforts to imple- ment state-of-the-art technological systems in line with a regulatory push to automate banks’ operations. Commenting on the ‘banking float’, which is the duplicate money present in the banking system between the time when a deposit is made and when the funds become available in an account, Nadeem says that the State Bank of Pakistan wants to reduce the banking float, which “could be achieved through a technology engine called Real-Time Gross Settlement (RTGS). Citibank N.A. is expected to be the first bank automated on RTGS with the SBP in the first quarter of CY14.” When asked about the economic backdrop, Lodhi said the bank remains bullish about the Pakistani market in the CY14. “Our niche clientele, mainly MNCs, consider Pakistan to be in their top ten growth markets. If they do well, it reflects positively on our performance,” comments Lodhi. He believes that the energy sector is the key area that will turn around economic growth in the coming years and bring a revival in the fiscal system. “The decision to tackle the three Es [energy, economy and extremism] is the correct formula employed by the government and will bear fruits soon.” Interview by Zuhair Abbasi & Sobia Saleem “We’ve recently advised Unilever on share buy-back of Unilever Pakistan and delisting from the Pakistani exchanges which contributed to be the single largest FDI in the recent history of Pakistan.” 31 / Banking Review 2013
- 32. 32 / BankingReview 2013 Agrilending Thereisperhapsnoneedto argue that agricultureisoneofthemostimportantsectors oftheeconomyand,therefore,requires frequentpatsonthebacksandincentivessuch aspriorityonthelendingroster.However,like mostdevelopingeconomies,Pakistan'srural creditmarkethastheusualsuspectsin store: co-existenceofformal,semi-formaland informallendersandaweakregulatory frameworkthatbogsdown more than itenables. Howeverfromthefaceofit,thingshavebeen rapidlyimproving.TheStateBankofPakistanhad settheagricultureloandisbursementtargetat Rs360billionforfiscalyear2014,followingwhich thebanksdisbursedRs159.3billion–or44 percentoftheannualtarget-inthesixmonths endingDecember2013.Theoutstandingportfolio ofagriloansalsosurgedby17.3percenttoRs 276.7billionatendofDecember2013. A lot of that can be credited to the inclusion of the private sector into the lending mix. With the induction of 14 domestic private banks into the agricultural credit scheme in 2002 and the removal of mandatory credit targets for big five banks from 2005, the share of commercial banks has shown significant rise in the overall agri credit disbursement. Conversely,theshareofspecializedbanks, namelyZTBL&PPCBL,inagriculturalcredithas declinedfrom73percentinFY01to26percentin FY13.Thetrendalsoshowsthatwhilecommercial banksarecontinuouslysurpassingtheirindicative credittargets,thelikeofZTBL,whichonly managedtoextendRs23.7billionatthecloseof thefirsthalfagainstitsannualtargetofRs70 billion,havestartedtolagbehindconspicuously. Segmentation and collateral: still some way to go! Money lent for agriculture is still widely being used for purchase of urban properties and expensive cars, a fact alluded to by almost every banker this scribe talked to during initial research on the subject. Additionallygrossirregularitiesarealsovisiblein otheravenues.RecallthattheStateBankof Pakistanintroducedrulesformandatory insuranceoftotalcreditextendedtofarmersand alsopromisedtoreimbursepremiumpertaining to‘subsistencelevelfarmers’visibleacrossthe board.However,amajorityoftheamounts extendedremainuninsuredandevenifthelosses areindemnifiedbyinsurers,corporationslike NationalInsuranceCorporation,consistentlyfail tomaketimelypayments. Furthermore,anenquiryintoabreak-downof creditextensiontofarmhouseholdalsoreveals anomalies.Accordingtocalculationscomputed fromthelatestAgricultureCensusof2010, householdswithlargeoperationalholding(more than25acres),whomakelessthanonepercentof thetotalborrowers,obtained73percentoftotal creditexclusivelyfromformalsources. In contrast, households with operational holdings under 5 acres, which constitute 65 percent of the total farming households in the country, received only 31 percent of loan extended by formal sources. Additionally, subsistence farmers, comprising 35 percent of borrowing households as per the census, got only 18 percent of their total loans from formal sources during the same time. Ofthosethatreliedexclusivelyoninformal sources31percentweresubsistencefarmersand 25percentwerelandlesshouseholds,which meansthatthehighestproportionsofthosewho canbecategorizedasthepooresthouseholdsstill dependexclusivelyoninformalsources. One of the reasons often cited to explain away this skewed disbursement of credit is the inability of small and tenant farmers to provide acceptable collateral. However,someheadwayhasbeenrecentlymade toremedythesituation.Theassessmentofthe valueofthelandforcollateral,arenowcomputed onthebasisofthe3-yearaveragesofthevalueof landmutationsinthearea,accordingtothe governmentlandrecord.Thishashelpedslightly easeamajorimpedimenttotheproperassess- mentofthevalueofthecollateral. Nonetheless, the State Bank still needs to look into this area and rationalise the loan and collateral ratio so that more financing institu- tions can take up the cause. But to give credit where it is due, the SBP has recently been on a bit of an agri bender, having made amendments to the prudential regula- tions, indicative credit limits and the list of items eligible for agri credit earlier this year. Some of the important revisions to the regulations are highlighted in the enclosed box. However, clearly enough, the increased level of agricultural lending alone cannot raise the farm productivity and contribute to the national economy if bottlenecks like water efficiency, land record management, proper marketing and storage, adoption of modern techniques, mechanization and other agri innovations and efficient use of extension services are not addressed. JaveriaAnsar Source: Agriculture Census 2010 Agriculutre credit by source and farm size Supply of agri credit by institution Z.T.B.P 11769 11,769 43644 70362 69014 73321 63447 34088 12945 2043 1699 C.B's 50885 1,782 6798 9373 7989 8529 8192 4594 2413 588 624 MFI's 29157 2,024 7059 8050 3709 4704 2260 951 316 34 49 NGO's 15703 1,071 3721 3182 3162 2142 1688 618 86 4 35 Commission agents 230502 7,898 51007 51161 39936 35250 26972 13010 3896 654 700 Friends & Relatives 493382 53,594 145900 107712 69889 7227 3270 1377 536 21 36 Source of credit 10181907 75,084 237762 225783 174993 164723 119656 58050 19536 3185 3154 Total households under agricultural debt Farm household total Under 1 acre 1.0 to under 2.5 2.5 to under 5.0 5.0 to under 7.5 7.5 to under 12.5 12.5 to under 25.0 25.0 to under 50.0 50.0 to under 100.0 100.0 to under 150.0 150.0 and above Size of farm (Acres) • State Bank of Pakistan has very recently enhanced per acre limits for major and minor crops, orchards and forestry. According to revised report on Indicative Credit Limits & List of Eligible Items for Agri Financing released in early 2014, financing limits per acre for rice, wheat, cotton and sugarcane have been increased to Rs 34,000, Rs 29,000, Rs 39,000 and Rs 53,000, respectively from existing limits of Rs 19,000, Rs 16,000, Rs 21,000 and Rs 30,000 fixed in 2008. • The bank has also re-developed working tables for assessment of per acre credit for each crop, which may be used by field officers in case of variation in limits rather than indicative lending limits. • Per acre use of fertilizers for major crops and orchards has been updated. Size/Classification wise number of farms as percentage of total number of farms in province has also been re-defined. • List of eligible items for agri. financing has been updated. • Total cash and credit requirements for seeds, fertilizers, and pesticides for medium and large farms are revised to 80 percent and 60 percent, respectively, compared to 70 and 50 percent in the previous report. Amendments in indicative credit limit and eligible items for Agri-financing Thewriterworksas ResearchAnalystat BusinessRecorder. Shecanbereachedat javeriaansar08@gmail.com -20 0 20 40 60 80 100 120 140 160 180 FY08 FY09 FY10 FY11 FY12 FY13 Rs Bn 5 big CBs ZTBL DPBs PPCBL MFBs Source: SBP
- 34. Attock Bahawalpur Bahawalnagar Bhakkar Chakwal Chiniot Dera Ghazi Khan Faisalabad Gujranwala Gujrat Hafizabad Jhang Jhelum Kasur Khanewal Khushab Lahore Layyah Lodhran MandiBahauddin Mianwali Multan Muzaffargarh Narowal NankanaSahib Okara Pakpattan Rahim YarKhan Rajanpur Rawalpindi Sahiwal Sargodha Sheikhupura Sialkot TobaTekSingh Vehari PUNJAB Abbottabad Battagram Buner Charsadda Chitral Hangu Haripur Karak Kohat Kohistan Lakki Marwat Malakand Mansehra Mardan Nowshera Peshawar Shangla Swabi Swat Upper Dir Lower Dir Bannu Tank Dera Ismail Khan KHYBER PAKHTUNKHWA Thatta Karachi Badin Tando Muhammad Khan Mirpurkhas Tharparkar Umerkot Jamshoro Hyderabad TandoAllahyar Sanghar Matiari Shaheed Benazirabad Khairpur Sukkur Ghotki KashmoreJacobabad Shikarpur Kambar Shahdadkot Naushahro Firoze Dadu Larkana Awaran Barkhan Kachi Chagai DeraBugti Gwadar Jafarabad JhalMagsi Kalat Kech Kharan Kohlu Khuzdar KillaAbdullah KillaSaifullah Lasbela Loralai Mastung Musakhel Nasirabad Nushki Sibi Panjgur Pishin Quetta Sherani* Washuk Zhob Ziarat SINDH BALOCHISTAN These mapsshow district wise bank branch density in the country. The density is presented as number of people serviced per branch in each district (See legend). The maps highlight a clear demarcation of districts that remain under-banked relative to others. The disparity is visible both inter-provincially as well as within each province. Although maximum accuracy was sought during this exercise, readers are advised to note the qualifications stated below. In our opinion, however, these qualifications do not distort the overall picture. Differenceindates: Data pertaining to the location of bank branches have been obtained from State Bank of Pakistan’s annual publication called Banking Statistics of Pakistan for the fiscal year ended June, 2012. We thank Free and Fair Elections Network (FAFEN) for providing us the latest district-wise population estimates (as of June 2013), which in turn was obtained from Election Commission of Pakistan. Bank selection: The branches of all scheduled commercial banks with retail operations were included. Accordingly, for the sake of consistency, foreign banks, DFIs and micro-finance banks have been excluded. Unidentified branches: 223 or 2.3 percent (of 9,792) branch locations remain unidentified in terms of district due to lack of clarity over tehsil/council/ village name. Branch locations for AJK, FATA and Gilgit-Baltistan have been identified, but are excluded from mapping for the sake of consistency in comparison with other provinces. District classification: Boundaries of several districts have been redrawn since the year 2000, with new districts created at different stages. Outside FATA and Gilgit-Baltistan, the total number of districts in the country is 118, including the four provinces and the Islamabad Capital Territory. Mappingthe disparityin bankbranch network across Pakistan Islamabad *No bank branches were identified in SBP statistics for Sherani district, Balochistan. Latest district wise demarcation has been sought while locating bank branches, but lack of availability of accurate data on newly created districts led to their inclusion within the former boundaries. These exceptions include: Harnai,Balochistan:carved out of Sibi district in August, 2007 Torghar,KPK: carved out of Mansehra district in January, 2011 Lehri,Balochistan: carved out of Nasirabad district in May, 2013 Sohbatpur,Balochistan:carved out of Jafarabad district in May, 2013 Sujawal,Sindh: carved out of Thatta district in October, 2013 1 - 9,999 10,000 - 19,999 20,000 - 29,999 30,000 - 30,999 40,000 - 49,999 50,000 - 4,999 75,000 - 9,999 100,000 and above The legend depicts the number of people served per branch where population estimates have been taken as a proxy. LEGEND The 34 / Banking Review 2013
- 35. Bank of Punjab: eyeingthe unbanked The conversation took off from the problems inherited by the new manage- ment. From poor asset quality to deposit withdrawal and high cost of funds, the bank had suffered from a complete range of problems that came in a variety of shapes and sizes. But the bank’s new management has managed to turn the situation around. Khan tells us that non-performing loans has come down to Rs65 billion from Rs80 billion in FY10. He adds that Rs3.6 billion has been recovered from Harris Group, whereas 1,912 recovery suites against defaulters have been filed by the new management. The massive deposit withdrawal of Rs50 billion to due to negative market percep- tion has also reversed to a point that the deposits rose to about Rs295 billion from Rs164 billion in 2008. Even the cost of funds has dropped to 7.15 percent from nearly 11 percent booked earlier. The bank has also improved on its investments side. Khan says that at the close of FY13 the bank’s investments stood at Rs136 billion, up from Rs25.7 billion in 2008 with an improved mix. In 2008, 53 percent of investments were in illiquid mutual funds, now 94 percent of investments are in government securities. As a result of these efforts, the bank’s bottomline went from pre-tax loss of Rs16.8 billion in 2008 to a modest pre-tax profit of Rs523 million in 2011 and Rs1.54 billion for the six months ending June 2013. Total assets grew from Rs143.5 billion in 2008 to Rs329.4 billion at the end of FY13. Bad debt management Going to back to discussion on bad debts Khan said that “our infection ratio has already gone down; the SBP had given us a target of reducing these by 4-5 percent each quarter and we are easily exceeding that. Going forward we are planning on increas- ing our lending in a massive way, which will make the mammoth task a little easier.” He added that the bank has “already recovered around Rs35 billion whereas we are also expected to see massive rever- sals.” “Additionally, we have foreclosed assets of around Rs12 billion from default- ers’ properties - landholdings, machinery, and other assets. Every 15 days we have an auction and sell them off. So we’ve already recovered more than a billion rupees from these auctions in lieu of cash.” Sharing the details of the Haris Steel transaction, Khan said that they are making good progress on that front as well. Aside from the recovery of around Rs3.6 billion, “there is an ongoing litigation in UAE as well and AED52 million is at stake there. In Malaysia we have virtually auctioned off all of Harris Steel’s assets - all their country homes and cars – and we expect around a billion rupees from that coming in by the end of this year.” While these positive developments, the difficult cases are still with the banking courts and NAB. “NAB has been extremely ineffective over the last year but we have higher hopes with the new head. We have filed nearly 2,500 cases in courts and we have not spared anyone - not even the highest and the mightiest. But the ball now is in the judiciary’s court. Depends on how quickly they make decisions,” he said. He stressed that all institutions can turn around in Pakistan if you put in the right people in the right place. “The biggest things keeping us behind are our own laws. And with all due respect, our judiciary needs to improve and the banking courts need to step up their game.” “In another 5 years we aim to resolve 80 percent of our bad debts, but this time would have been cut in half had the courts been more active. Additionally sometime we also feel handcuffed by the govern- ment and can’t make some aggressive moves because you’re afraid that it will be perceived as crony-ism or corruption.” Growth avenues Pointing to the success of bank’s consumer side, Khan highlighted that Bank of Punjab is the biggest lender in Pakistan in car financing. Contrary to popular perception, “we’ve had a very, very successful yellow taxi scheme, with a 98 percent recovery rate. The scheme might have been politically motivated but we fought a lot to make it bankable. They came to us with a wish list but we handed them our own bucket list of requirements right back. We made sure that every car had a tracker, and that is what has helped with the recovery rate. As soon as 180 days pass, we recover the vehicle and auction it off.” Khan adds that the bank has all major corporate on its lending books, which wasn’t the case before. “We are a growth oriented bank; we want to grow on both the asset and liability side. We want to bring our cost of funds down and are now well in control of the situation. The bank also plans to expand its Islamic footprint as a part of its growth strategy. “We’ve already launched our Islamic banking segment with four branches, and have crossed a billion rupee deposit. We also have Islamic financing proposals for around Rs1.5 billion lying with us, but deposits are low so our commercial banking side will subsidize what the shortfall rest for the time being,” he said. He added that the bank has asked for another 14 branches to be opened next year. “We expect a bright future, especially in great stretches of unbanked areas in the KPK where there is a lot of demand for deposit and even the smallest of branches offering Islamic banking have low cost deposits of Rs2-2.5 billion lying with them.” When asked about any plans to acquire a bank in the medium term to help with expansion, Khan said that he had proposed to the board that Bank of Punjab should buy HSBC. But the government said “no, forget it”. While he says that he would be open to a good proposal, he doesn’t feel that there are enough good buys in the market at the moment. “If we open 40-50 branches per year, we don’t need really any mergers. The one edge that we have is the government of Punjab’s very strong backing, so I think we should be good for the time being.” Khan says there are still so many unbanked places that we need to tap. “As the Bank of Punjab, we intend to expand aggressively across the smaller market towns and cities across the province - places where all that low cost money is lying around and there are very few banks. Places like Deepaal pur, Ghaziabad, and Siadpur - just to name a few, where potato and fruit and what-not farmers are sitting doing big money transactions with no banks for miles. So that’s where we are going now. We’ll be trying to take up concentration in smaller towns and open smart efficient branches in extremely targeted locations next year.” Interview by Ali Khizar & Javeria Ansar Naeemuddin Khan has been serving the Bank of Punjab as its President & CEO since Sept 2008. He started his banking career in ANZ Grindlays Bank in 1978 and over the last 35 years has amassed a wealth of diversified banking experience. He has also previously served as a member banking on the Corporate & Industrial Restructuring Corporation (CIRC), where he was responsible for the recoveries of the NPLs of over Rs142 Billion. BR Research recently sat down with the gentleman to talk about BOP’s journey through the troubled waters it had landed in and his vision and firm hand that has guided the bank back onto the right course. Following is a brief transcript of the conversation that took place during the meeting. Naeemuddin Khan President and Chief Executive Officer, Bank of Punjab 35 / Banking Review 2013
- 36. Sindh Bank nolonger provincial in character Bilal Sheikh assumed the charge of President & CEO of Sindh Bank in November 2010. Sheikh is a seasoned banker with over 45 years of diversified experience in banking. His last assignment before joining Sindh Bank Limited was that of President & Chief Executive Officer, Mybank Limited. Prior to that, he served as President & CEO, PICIC Commercial Bank Ltd, Chairman National Development Finance Corporation (NDFC) and Deputy Managing Director PICIC Limited. Below are the edited transcripts. BilalSheikh President and Chief Executive Officer, Sindh Bank Sindh Bank has grown fast. Like really fast. Following the permission to commence full-fledged business in April 2011 when it had only one branch, as of December 2013 the bank had expanded its network to 200 branches spread over 104 cities, towns and villages across all the four provinces and Azad Jammu & Kashmir. Commenting on this performance, Sheikh says that this is an all-time record as no other scheduled commercial bank has grown with such a speed. However, he adds, now the bank plans to consolidate and during the current year, only 25 Branches including 5 dedicated Islamic banking branches will be added to the network. But the bank has not grown in terms of branch coverage alone. Sheikh highlights how Sindh Bank has demonstrated amazing results in all key performance areas. By December 2013, its deposits stood at Rs46 billon with Government of Sindh’s deposits of Rs8 billion and the remaining 83 percent of the deposits being placed by corporate sector and general public. “This speaks of volumes of trust and confidence reposed by the general public in Sindh Bank,” he says. Sheikh expresses the hope that in the times to come, the share of government deposits will reduce as branches will be able to generate more deposits locally. “Islamic banking branches would also become functional during second half of the current year and the growth would gain further momentum achieving a deposit base of Rs65 billion by December, 2014,” he says. Commenting on advances, Sheikh says that lessons from the experience of banks and DFIs he had served and the industry at large, Sindh Bank has adopted a cautious approach towards lending. Its board has taken a policy decision not to extend long-term loans on stand-alone basis. The bank, however, has been participating in syndicated loans according to its size and risk appetite, thus sharing risks and rewards with the syndicate. He adds that working capital financing is being allowed on secured basis, mostly against pledge of commodities with guaranteed annual clean up. “Other than pledge, such working capital loans were secured by mortgage of properties located in up-scale areas of DHA, Clifton, and KDA & CDA with minimum risk of fake titles and price fluctuation,” he said. This policy, according to Sheikh, had proved very successful and during the first three years, there were no bad loans requiring classification or provisioning. Thus Sindh Bank could claim to be the only commercial bank of the country with zero NPLs. By December 2013, Sheikh said the bank’s advances stood at Rs27 billion including Rs5 billion given to the Govern- ment of Sindh for procurement of wheat under commodity operations programme guaranteed by the federal government. Like deposits, the ratio of advances to private-public sector was also calculated as 83:17. Sheikh hopes that the bank’s advances will grow to Rs40 billion by the end of current calendar year. Coming to the bottomline, Sheikh highlight that from the very inception, Sindh Bank has been showing profit and during the first three years of operations ending December 2013, the cumulative profit was over Rs3 billion. This too, claims Sheikh is a record as no other bank, be in public or private sector, has earned this much profit during its infancy. Sheikh is confident to earn much higher profits in days to come as branches opened during 2013 will be able to generate enough deposits to offset the expenses incurred on their establishment and also the recurring ones. The economy is also moving in right direction and the private sector’s demand for credit is on the rise. Moreover, the bank is diversifying its credit portfolio by enlisting more remunerative new relationships engaged in power, fuel, construction and beverage businesses. Although increase in the discount rate had off-set the mandatory higher rate of return on saving deposits, to augment its income stream, the bank is focusing on fee based exchange business, says Sheikh. Sheikh says that being a wholly owned government bank, Sindh Bank is quite zealously allowing agricultural loans in all forms like production loans, tractor loans, growers loans and non-farm loans for dairy, livestock and poultry, etc. Another item in Sindh Bank’s list of firsts is the fact that it is the only bank which had surpassed its annual disbursement target within the first six months of the financial year 2013-14. In addition to its core business, Sindh Bank is also an active participant of Benazir Income Support Program. It is offering free of cost services to Hajj pilgrims. Lately, Sindh Government has appointed the bank as the executing agency for granting loans for revival of sick industrial units of rural Sindh. Moreover, prompted by the success story of Sindh Bank, the Government of Sindh decided to launch three more companies in the financial sector, i.e. Sindh Leasing Company Ltd., Sindh Modaraba Management Ltd. and Sindh Insurance Ltd. Interview by Ali Khizar & Sobia Saleem “Islamic banking branches would also become functional during second half of the current year and the growth would gain further momentum achieving a deposit base of Rs65 billion by December, 2014” 36 / Banking Review 2013
- 37. 37 / BankingReview 2013 Impedimentstobuilding astrongerbondmarket Itisa sadreality that bond market in Pakistan has notbeen ableto evolveas avibrant, sizeableand liquidmarket that can serveas an engineof economic growth for thecountry. Thesizeof Pakistan’sbond market - measured as percent- age ofGDP-dwarfs in comparison to its money market.Thisarticlesurveys ahost of reasons behindthe inadequacy of bond markets. One of the main impediments to growth and development of bond market is high volatility in inflation and interest rates, which discourages borrowers and lenders from taking a long-term view on the economy and making long-term decisions/commitments. Investors in fixed rate bonds feel betrayed if inflation and interest rates increase signifi- cantly over short periods of time. Even in the case of floating rates on private sector bonds, investors may be seriously discouraged if sharp increases in inflation and interest rates result in defaults by businesses. Memories from the large scale defaults in 2008 and 2009 are still afresh in the mind of investors. Bond investors also typically feel more vulnerable as the collaterals underlying the private sector bonds are usually weak and the number of investors in long-term bonds is usually quite large. In case of default by the issuer, coordination and agreement between the lenders is difficult to achieve. In order to mitigate some of these predica- ments, Pakistan needs to start targeting inflation. Inflation targeting has become a widely accepted policy throughout the world as it provides an anchor to all market participants including savers, intermediaries and spenders and allows them to make long-term saving and investment decisions with greater confidence. On that note, the government should also grant autonomy to the central bank in order for it to stick to the target. Institutional void The second stumbling block in the develop- ment of the bond market is the shortage of institutions that have a genuine need for investment in bonds. Given longer maturity and higher risk of bonds, only investors with long-term horizons and/or higher risk tolerances can potentially invest in bonds. Such investors mainly include DFIs, pension funds, insurance companies and a few categories of mutual funds. The trouble is that due to various reasons, the growth of these institutions and their demand for bonds has remained limited. For instance, DFIs have been unable to raise long-term funds at competitive rates. Similarly, public sector pension funds are unfunded in most cases and therefore, unable to invest in bonds. Those in the private sector have been mostly converted into Defined Contribution Plans which do not use an asset-liability management framework to manage their assets. These plans are being managed on the basis of an asset-only philosophy which, based on their low risk tolerance, leads to a low allocation to bonds. In this vein, it is pertinent to highlight that the biggest pension liabilities are owed by the government itself but there is no explicit policy to fund the pension plans of federal, provincial and district governments most of which are managed on a pay-go basis i.e. the pension liabilities are paid out of taxes. This has not only resulted in poor financial management but has also deprived the capital markets of precious money that could be invested in long-term bonds. Federal, provincial and district governments must adopt explicit funding targets for their pension plans. Even in case of public or private sector entities with partially or fully funded defined benefit pension plans, professional manage- ment, that can understand and apply the concept of asset-liability management to the investment portfolios, is mostly absent. As a result, their pension plans investment portfolios have much smaller exposures to long-term bonds. A related part of the problem lies in inadequate insurance sector. Pakistan has one of the lowest insurance penetration in the world. Low per capita income and lack of an insurance culture, partly due to strong religious beliefs, have been major impediments to the development of insurance sector. With the advent of Takaful, however, it can be expected that the industry may grow at a higher rate in future. Still, the government needs to adopt explicit policies to promote a culture of insurance in the country. This may include compulsory motor vehicle insurance and life insurance by all individuals earning income above a certain threshold. Income tax rebates recently granted to individuals on payment of life insurance premiums are a welcome development. Tax rebates may also be offered to insurance/Takaful companies for creating awareness regarding the benefits of insurance through print and electronic media. Mortgage bond market Despitethefactthathousingandcommercial constructionsectorhasimmensepotentialto jumpstartPakistan’sGDPgrowthatahighratefor alongperiodoftime,arobustfinancialsystemto supportthissectorismissingfromaction. Such a financial system would consist of banks and housing finance companies on the one hand, which issue mortgage loans and, on the other hand, of mortgage companies which raise money from the market through mortgage bonds and invest the money raised through such bonds in mortgage loans. This will enablethebanks and housingfinance companies to convert their long-termilliquid assets (mortgageloans) into cashbyselling thoseloans and relend that moneyfornew construction projects. Themortgagecompanies will buy thosemortgageloans withthemoney borrowed from individuals and corporate entities.Thissystemwillalsohelptochannelthe savingsof individualsandcorporatesinto housingandconstructionsector. To achieve this end, there is a need to develop mortgage market. Federal and provincial governments should develop the legal framework to encourage/establish business entities that issue mortgage backed securities and invest the money raised through such securities in mortgage loans. This model has been successfully used by the US for many decades – though of course lessons should be learnt from the 2008 crisis to ensure that we only adopt the good aspects of the model. Munis, Munis Pakistandoesnothaveamarketforinfrastructure bondsusingwhichfederal,provincialorlocal governmentscanborrowforspecificpurposeof investmentininfrastructureprojects.Such projectsaredesignedinawaythattheycanearn enoughmoneyovertheirlifetimetoearnan attractivereturnoninvestmentrequiredto establishandrunthoseprojects. Federal government should adopt an explicit policy that borrowings through long-term bonds will only be utilised to finance infrastruc- ture projects. This will ensure that the money raised through long-term bonds will not be spent on short-term expenses and will contribute to higher future GDP growth and employment generation. The future of national development depends on higher devolution and enabling city/district governments to raise money from capital markets and invest it in infrastructure projects. This requires making requisite amendments in federal and provincial laws relating to the financial powers of local governments. It may take a few years to build the capacity of local government and to create the institutions for effective oversight of the financial activities of local governments but it will eventually create huge opportunities to mobilize resources through capital market securities (mainly long-term bonds). Bear in mind that federal and provincial governments have already passed laws relating to public private partnership laying the foundations of attracting private capital and management to the infrastructure sector. The next step is to strengthen the provincial planning and development departments so that they can provide the necessary technical and financial support to the government departments/agencies for developing and structuring infrastructure projects that are attractive enough so that private investors can raise part of the finances by issuing capital market securities. AbdulRehmanWarraich The writer works as Chief Investment Officer at UBL Fund Manager. His views do not necessarily represent those of his organization. The future of national development depends on higher devolution and enabling city/district governments to raise money from capital markets and invest it in infrastructure projects.
- 38. 38 / BankingReview 2013 First Women Bank Ltd. is proud to be the first bank for women in the region. FWBL both a commercial bank and DFI designed, managed and run by women, for women, was set up in 1989 by the Islamic world’s first woman Prime Minister Benazir Bhutto (Shaheed) who envisioned a bank that would meet the special needs of women entrepreneurs. Recently, the Finance Division, Government of Pakistan has given the additional charge of President of the Bank to Ms. Charmaine Hidayatullah, the senior most EVP of the Bank. The FWBL model caters to women at all levels of economic activity – micro, small, medium and corporate. Most importantly, the Bank provides women with the support services required to navigate the obstacles to the development of business. By doing so, FWBL is helping them emerge as key players in the national and global economy. The Bank has always looked at its micro- finance borrowers as potential SME and Corporate clients. The Bank’s unique credit policies promote asset ownership for women, by providing financing to business entities: • Where women have 50% shareholding • Where a woman is the Managing Director • Where women employees are 50% or more However, the Bank seeks deposits from and provides services to both genders. In 1992, an ILO Geneva Study recognized First Women Bank Ltd. as a major innovation in Pakistan, along with Edhi Trust and Lahore University of Management Sciences (LUMS). In 1994, Euromoney awarded FWBL the Best Bank in Pakistan for its low administrative cost. FWBL was the first Commercial Bank to launch Micro-Credit in Pakistan. In 2001, Women’s World Banking in its Global Directory profiled FWBL for Banking Innovation in Micro-Finance, and acknowledged that FWBL features among the world’s micro-finance leaders. To combat child labor in the carpet weaving industry, FWBL collaborated with ILO and directly financed women micro-borrowers in rural areas. The Bank disbursed micro-credit to 2921 women living below the poverty line in 162 villages, with 100% recovery rate. Under this project, 5842 children were weaned out from child labor and educated through non-formal educational centers. The Asian Banking Award 2005 awarded First Women Bank Limited, FWBL / ILO – IPEC Micro-Credit Program as Runners-Up in its Micro-Finance Program category. Under this project, one of the borrowers received the Global Micro-Entrepreneurship Award (Runners-up) organized by the UN Capital Development Fund in collaboration with CITI Group Foundation, Harvard Business School and Pakistan Poverty Alleviation Fund. FWBL initiatives for the empowerment of women were recognized at all levels and the Bank received the “Brands of the Year Award (2010 & 2011) for the second consecutive year. Recently theBank was conferredwiththe8th Consumers ChoiceAward. This wasinacknowl- edgement of FWBL’s contributiontowardsthe promotion of women banking in thecountry. In Pakistan, when compared with other countries of the world, female entrepreneur- ship is amongst the lowest in the world. With very low female participation in the economy of the country, the percentage of female employers is even less than one percent. FWBL is committed to the goal of realizing the potential of women who require assistance in enhancing their access to entrepreneurial activities and forward employment. Realizing the importance of women’s entrepreneurial activity and its linkage to loan facilities, Women’s Entrepreneurship Development Division has been created with the objective of Capacity Building and Skill Development of existing and potential women entrepreneurs and their facilitation to Business Development and Financial Services provision. Three Business Development & Training Centres are functioning in Karachi, Lahore & Islamabad under this Division. To enhance women’s entrepreneurial capability, FWBL has partnered with SMEDA, Department of Youth Affairs, Government of Sindh, UNIDO, Allama Iqbal Open University Islamabad, Women Chamber of Commerce and Industry and AF USAID. Under the FWBL-Gender Equity Program (GEP), supported by AF USAID, 640 women have successfully participated in the trainings offered at BD & TC Karachi and Lahore Centres. Recently the Government of Pakistan launched a credit scheme for youth aged between 21 to 45 years at a concessionary mark-up of 8%, with 50% special quota for women. Under the scheme all FWBL branches are providing loans to women. The Account facilitates families to do business from a single point. It offers many benefits for free, including a special one where the higher the balance in the account, the higher the number of free transactions. First Women Bank Limited (FWBL) and State Life Insurance Corporation (SLIC) have entered into a strategic partnership to sell insurance products under Bancassurance. The three product plans Endowment Plan, Three Payment Plan and Sada Bahar Plan are being offered under the partnership. In order to provide multiple benefits to customers, the Bank has collaborated with top brands such as Oxford University Press, Stile, and Singer. Now FWBL ATM card holders can get discounts on their purchases. FWBL wasformedwithshareholdingsfromall thelargepublicsectorbanks.Overtime,these bankswereprivatized;however,theirsharesin FWBL werenottransferredtothepublicsector. In2009,theGovernmentof Pakistandecidedto keepFirstWomenBank Ltd.(FWBL)inthe publicsectorbypurchasingthesharesof private shareholderbanksi.e.MCB,HBL,ABL andUBL throughStateBank of Pakistan.Nowthemajority of sharesareownedby theMinistryof Finance, Governmentof Pakistan. The Government of Pakistan vides its letter No. F. 4(1) –DS (BR-II)/ 2000-556 dated November 4, 2011, has exempted FWBL from the application of the Office Memorandum No. F.4. (1)/2000-BR-II, dated 12 November, 2002. Under the said Office Memo, the Government laid down certain requirements to be complied with by public sector enterprises and local/autonomous bodies while depositing their working balances for their operations with any public or private bank. FWBL has always looked out for the best interest of the women of Pakistan. From economic empowerment to financial assistance, FWBL has always put women at the forefront of their efforts. Taking another step towards the wellbeing of the women of Pakistan, FWBL has joined hands with Pink Ribbon Pakistan to promote the noble objective of Pink Ribbon Pakistan in providing cancer awareness among women. The Bank is also live on SWIFT to transfer funds internationally. At present, the Bank has a network of 41 branches in 24 cities of Pakistan. Today, FWBL’s mission for empowering women remains unmatched. “Totransformthestatusof womenfrompassive beneficiariesofsocial servicestodynamicagents ofchange.” First Women Bank Ltd. Giving Women The Power To Succeed Advertorial Celebrating 25yearsof Empowering Women