Boom of Banking Industry in Pakistan

8/8/2019 Boom of Banking Industry in Pakistan

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BOOM OF BANKING INDUSTRY IN PAKISTAN

Saeed Ahmed Sheikh


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Sequence of Presentation

Introduction

Historical background of banking in Pakistan

Boom after Liberalization/ Privatization Boom in Islamic Banking

Banks Role in economic growth of Pakistan

Potential of Banking Industry to boost economy:

Recommendations.

Conclusion

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Introduction

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A growing and dynamic banking sector is essential for

the economic growth of a country.

An inefficient banking sector drags the economy. The growth in the banking sector and the real economy

mutually reinforce each other.

Banks not only work as storehouse of a countrys wealth

but they also work as tool for development by facilitating(through lending & consultation) prudent investments in

different sectors (preferably in new sectors).


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Introduction

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Banking industry in Pakistan has shown an

unprecedented growth in recent years.

Judged by any indicator, the dynamism and robustness of

banking sector is impressive . The growth in banking system has been driven by rise in

deposits and advances to trillions.

Deposit base Rs 4.48 trillion

Gross advances Rs 3.11 trillion

Aggregate profitability Rs 71.1 billion

Source: Quarterly Performance Review of Banking, SBP, September 2009

Continued


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Introduction

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This rise in deposits and advances to trillions has tempted

different economists to term this growth as boom.

However, this boom needs a thorough & detailed

evaluation to gaugei) whether this boom in baking industry is a reality or a

mere perception;

ii) is this boom (if it is a reality) making any contribution

towards the growth of the economy, and

iii) does the banking sector embodies in itself a potential to

further boost the economy.

Continued


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Historical Background of Banking in Pakistan

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FORMATIVE PHASE (1947-1948)

Pakistans banking system started from a scratch.

From June 3rd 1947 to June 30th 1948, number of branches

decreased from 487 to 195. In 1947, Pakistans banking system had 19 non-Indian

banks (with their small branches) and two of its own banks:

Habib Bank & the Australasia Bank.

Number of subversive activities of Imperial Bank of Indialed Pakistan to open her own central bank .

Father of the Nation inaugurated State Bank of Pakistan on

1st July, 1948.

MCB shifted its head-office in 1948 from Calcutta to Dhaka


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PHASE OF EMERGANCE (1949-1958)

Pakistans banking system started emerging .

NBP was set up under an Ordinance in November

1949 with a view to work an agent of SBP. Habib Bank also continued expanding its organization.

The number of bank branches rose from 195 to 307(by the end of June 1958).

Deposits rose from Rs. 88.05 crores (in July 1948) toRs. 238.94 crores (in July 1958). Total bank credit rosefrom Rs. 19.78 crores to Rs. 122.55 crores over theperiod.

Source: S.A. Meenai, Money & Banking in Pakistan, Royal Books, Karachi, 1977.


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PHASE OF GROWTH (1959-1970)

Pakistans banking system witnessed a remarkable growth.

In 1959, United Bank was established.

Several new banks were added to the list of scheduledbanks; two principal additions were the Commerce Bank

and the Standard Bank.

The number of bank branches rose from 430 (end of June

1960) to 3133 (by the end of CY1970). Deposits rose from Rs. 294.31 crores to Rs. 1314.69 crores

(end of June 1970). Total bank credit rose from Rs. 145.83

crores to Rs. 949.20 crores.

Continued



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PHASE OF STRAINS (1971)

In the wake of political disturbances during 1971-72,

Pakistans banking system witnessed serious shocks &

strains. There was heavy withdrawal of deposits from banks.

Government started a demonetization operation in

June 1971 that also brought certain stresses for the

monetary system of the country.

Continued


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PHASE OF NATIONALIZATION (1972-1977)

After the separation of East Pakistan, the newgovernment introduced far-reaching banking reformsin May 1972 by which SBP was vested with wider

powers In 1974, Nationalization of Banks Act came into force

by which all the CBs were brought under theownership of Government with effect from 1st January1974.

The number of bank offices rose to 5187 in 1977; theexpansion was particularly rapid in rural areas of thecountry.

Continued



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PHASE OF HEALING REFORMS (1978-1996)

Nationalization affected the performance and efficiency ofthe banks in the long run.

Government revised nationalization policy andconsequently the Banks (Nationalization) Act, 1974 wasamended in 1991.

As first step twenty three banks were allowed to work (10banks belonged to domestic sector and rests were

international/foreign banks). The process of denationalization/privatization of

Nationalized Commercial Banks (NCBs) was also startedwith the privatization of MCB and ABL.

Continued


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PHASE OF STRUCTURAL REFORMS (1997-2002)

In 1997, SBP directed banks to submit their annualaccounts on new formats of CAMELS & CAELS as perinternational standards.

Banking Companies Ordinance (1962) and the State Bankof Pakistan Act (1956) were amended.

The Banking Tribunal Ordinance (1984) and BankingCompanies (Recovery of Loans) Ordinance (1997) wererepealed through promulgation of Banking Companies(Recovery of Loans and Advances, Credit and Finance)Ordinance (1997).

Pakistan Banking Council was abolished .

In its help to Government, WB approved a credit for thePakistan Banking Sector Restructuring and PrivatizationProject (PBSRPP).

Continued


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Boom after Liberalization/ Privatization16


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Boom after Liberalization/privatization

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After 2002, banking system of Pakistan started getting a

boom. This boom was real ( and not a mere perception or

deception)on number of grounds.

It emerged out from well a coordinated restructuringprocess ( BASEL I & II, equity injection, etc.)

Post-liberalization period enunciated a healthy competition

that persuaded banks to do all the best they could.

Banks broaden-base (increase in number of

branches)mobilized more saving.

SBPs regulatory and supervisory framework paved the way

for banking of international standards.

Extensive use of IT attracted both customers & savings.


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PROFITABILITYDuring the period from CY 05-09, average profitability has

been Rs. 66 billion/year ( This period also includes the period

of global economic recession.)

Continued

Source: Quarterly Performance Review of Banking System, SBP, 2009


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SOLVENCYThe banking system of Pakistan has been posting consistent

improvement in risk-based Capital Adequacy Ratio since the

introduction of Basel-II framework.

Continued



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BALANCE SHEET ANALYSISDuring five years from 2003-07, banks deposits grew

successively at an average of18.1 % (though during CY08 they

fell to 9.4 % due to economic recession). Assets, Investments,

Advances have also been on rise

Continued



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Boom in Islamic Banking

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Since its emergence in 1970s Islamic finance has grownsignificantly around the globe.

There are now more than 300 IFIs operating in around 75countries.

Assets of IFIs worldwide have grown to about US$ 700billion with annual growth exceeding 10.0 % during thepast decade and are projected to grow to US$ 1.6 trillion by2012.

In Pakistan, since its re-launch in 2002, Islamic banking hasgrown progressively showing 59 % per annum increase inasset base since 2005.

The branch network of six full-fledged Islamic banks and 13conventional banks, covering 80 cities, has increased up to560.

Source: Islamic Finance Outlook 2009, Standard & Poors, 2009


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PROFITABILITYIBIs are in the process of growing, yet their profitability is

remarkable. Since CY2007, their profit after tax has been

crossing Rs. 1 billon. During 2nd quarter of CY 09, the

profitability of IBs has picked up with an increase of more than

150 %.

Continued



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SOLVENCYThe CAR of the six dedicated Islamic banks as specified in the

Basel II framework clearly shows that they have successfully

achieving the target of achieving 9.0 % CAR since CY08.

Continued


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BALANCE SHEET ANALYSISPakistani IBs, though they are in an expansion phase and

resultantly their administrative costs are relatively higher, yet

they are still showing 60.0 % per annum growth in both the

assets and deposit base since 2007.

Continued



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Banks Role in theeconomic growth ofPakistan

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FINANCIAL STABILITYThe stability of the Pakistans financial system finds its roots in

the predominant position of the banking sector, a s i n

comparison to other components of the financial system, the

banking sector has grown more in relative terms



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Banks Role in economic growth of PakistanFOREIGN DIRECT INVESTMENT

Profitability in Pakistans banking sector, emerging out of the

growing size of the economy, has brought a significant FDI in

this sector. On the whole, the sector has induced FDI of US$

4.2 billion over the last 7 years.

PICIC was acquired by Tamaesk Holdings for $339 million.

Union Bank by Standard Chartered Bank for $ 487 million.

Prime Commercial Bank by ABN Amro for $228 million.

The May Bank made the biggest investment ofUS$ 907 million

in banking sector (as it buys up to 20% of Pakistan's MCB ).Other countries flocking Pakistan for FDI in banking sector are

Switzerland with an investment of US$ 200 million, United

Kingdom US$ 125 and Saudi Arabia US$ 200 million.

Continued

Source: Wikipedia, the free encyclopedia.


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FOREIGN EXCHANGE RESERVES

Pakistan's total liquid foreign exchange reserves stood at

$14,123.5 million: according to break-up, forex reserves held by

SBP & banks were $10,494.0 million & $3,629.5 million

respectively.Increased outreach of banks under Pakistan Remittance

Initiative a round-the-clock & securest initiative of sending

remittances, has brought an unprecedented increase in the

inflow of remittances. These increased gradually from almost

$1.0 billion to $7.81 billion by the end of last fiscal year.

During H1 FY-10 their amount was $4.531 billion, displaying an

increase of $891.07 million or 24.48 % over the same period of

last fiscal year.

Continued



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INVESTMENT IN MICRO-FINANCIAL & SME SECTORS

There has been a remarkable growth of 36.1% during the

period June 05 to June 09 in the SME number of borrowers. At

the end of June 2009, Microfinance borrowers & SME

borrowers stood at 683503 & 219,062 respectively

constituting about 4.7 % of the total borrowers in the bankingindustry.

Continued



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BOOSTING TRADE

The introduction of Part I & II of Export Finance Scheme

(EFS) & also Islamic Export Refinance Scheme (IEFS) in 2004

has boosted trade.

Refinance limits at Rs. 221 billion assigned to the various

banks for current FY 2009-10 are 58% higher than limits onFY2008

Continued



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LOANING TO AGRICULTURE

Agriculture the main source of livelihood for 66% of the

countrys population.

Banks disbursed Rs. 233 billion during FY 008-09 in agri-

credit & the number of agri-loan borrowers was 1.91 million at

end June, 2009.

Continued



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HOUSING FINANCE

The housing and construction sector of Pakistan has a higher

multiplier effect of having linkages with 37 allied industries

After the emergence of CBs in mortgage business, the

housing finance portfolio has grown considerably from Rs. 37

billion in 2004 to Rs. 84 billion at the end of 2008

INVESTMENT IN INFRASTRUCTURE SECTOR

Banks investment in this sector has been rising @ 25.7%

per annum since 2005.It was Rs. 115.4 billion at the end of June 2009

Continued



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Potential of BankingIndustry to boost economy:Recommendations

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Potential of Banking Industry to boost

economy: Recommendations35

EXTENDING BASE OF BANKING SERVICES

Pakistan has the highest number of people per bankbranch ratio in the region, second only to Bangladesh.

Currently 37 % of adults have bank accounts.

Number of borrowers (5.5 million) constitutes only 3.5 %of population.

There are only 171 deposit & 30 loan accounts per 1,000people.

Over half of the population saves, but only 8 % entrusttheir money to formal financial institutions.

One-third of the population borrows, but only 3 % useformal financial institutions to do so.

Source: Pakistan Microfinance Network, 2008


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Most services are concentrated in Karachi and other urbancenters while 2/3 of the population resides in rural areas.

Surprisingly, an average of 42,000 rural-inhabitants has onebank branch

With 24 % of the population (nearly 40 million people) livingbelow the poverty line, this exclusiveness is critical.

SBP should link the issuance of license to new braches withestablishment of certain number of branches in rural areas.

SBP should encourage introduction of innovative deliverychannels ( such as branchless banking) .

Enhancement of borrower-ship by crossing illiteracy andcultural and language barriers is also required.

Continued



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ISLAMIC BANKING

Shariah-based banking can attract even orthodox sections of

society.

So far, IBs have no branches in rural areas, where they clearlyhave a substantial customer base to explore.

SBP, under its new branch licensing policy, can persuade IBs

to increase rural branches @ 20% of all new branches

opened; this figure can be increased upto 40%. Islamic Banks should also be regulated through SBP to invest

in microfinance & SME sectors.

Continued


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INVESTMENT IN MICRO-FINANCE SECTOR

Reach of Microfinance in South Asia

Women are a poorly explored section of this tremendous

growth activity. Country-wide microfinance bank with a concept of banking

with the poor ( targeting 10-20 million poor)should beopened.

A Question for CBs, Why banking only for 6 million rich?

Continued

Bangladesh & Sri Lanka (high) 60% of the total poor

India & Nepal (medium) 48% & 20% respectively

Pakistan & Afghanistan (low ) 5 % & 2% respectively



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INVESTMENT IN SME SECTOR

SME sector is the backbone of Pakistans economy.

There are approximately 3.2 million business enterprises in

Pakistan, out of which 90 % employ up to 99 persons.

There are around 214,948 SME borrowers (CY 08) as banks

provide only 78 % of the total funding requirements of SMEs

in the country

SME Bank cannot satisfy to a pool of nearly 3 million potentialSME borrowers. SBP should regulate all CBs to go after a

program-based SME lending in harmony with human

resource capacity helped by IT infrastructure.

Continued

Source: IFCs Report: Pakistan Microfinance & Financial Sector Diagnostic Study, 2008


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AGRICULTURE LENDING

Agriculture is a dominant driving force for growth.

For Pakistan, a volume of Rs. 200 plus billion agri-loans is not

enough; it should be at least tripled to meet 75-80% of theagriculture credit requirements within 3 to 5 years.

Lending to the livestock, fisheries, horticulture & dairy sub-sectors should be made according to the needs of differentareas.

Banking in rural areas should also adopt new innovativeapproaches of branching.

Existing SBP rules call for banks to establish at least 20% oftheir new branches in rural areas, but as a matter a fact thenumber should be increased to 60%.

Continued


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INVESTMENT IN HOUSING SECTOR

Pakistan has an estimated shortage of about 7 million housing

units.

The CBs' mortgage loan portfolio is concentrated in the major6-8 metropolitan cities .

Their average loan size is nearly 1/10th of that of HBFC.

For CBs, 70-80 % of the housing finance is for sale/purchase

as they take financing for new construction as more risky

An efficient Housing Policy in consultation with all the

stakeholders ( major being CBs) should be introduced.

Continued


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PRIVATIZATION OF GOVT-OWNED BANKS.

HBFCL, Industrial Development Bank of Pakistan (IDBP) andSME Bank have out-served their purposes; failing to meet

their targets. According to SBP the weak financial performances of these

banks have forced them to borrow from the SBP.

Zarai Taraqiati Bank Ltd. (ZTBL), needs financial andoperational restructuring. This bank is highly strategic, as it

provides about one third (31.7%) of all credit to theagriculture sector.

SME Bank should be privatized, the HBFC restructured priorto privatization and the IDBP should be incorporated as apublic company before it is available for sale.

Continued

Source: State Bank of Pakistan


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RATIONALIZING INTEREST RATES.

A distortion in interest rates deters savings and also distortspossible economic developments.

A minimum deposit rate of 5 % p.a. for all PLS savings productis not the remedy.

The PLS system in its present form is unique to Pakistan andexcessively beneficial to the banks.

The interest-rates problem in case of CBs lies with theirloans; pleading them @ 14% & charging @ 30-40%.

The role of SBP and Banking Mohtasib, in such cases, needs athorough revamping.

World-wide there are efficient mechanisms for consumer-protection while in Pakistan it is weaker. A financial literacyprogram to cover both rural and urban areas can be started.

Continued


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NEW BANKING ACT.

There is a growing need of new SBP Act, that can establish

the SBP as the primary regulator and supervisor of all banks.

All those sector, which are crucial for development of

economy, demand a proactive role of State Bank.

SBP needs unambiguous powers to intervene in unviable

banks & non-professional banking .

To reap maximum benefit out of the boom in bankingindustry, Government should bring new Banking Act.

Continued


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Conclusion

Conclusion

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Conclusion

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Banking system of Pakistan, in its different phases of history,

has not only been improving itself but has also shown a

strong tendency to compete with the forthcoming

challenges. At present, when Pakistans macroeconomic indicators are

showing strength, banking industry of Pakistan should try to

play a pivotal role in the further improvement of this

economy. Banking system, with its potential, still needs to do a lot in

different sectors (like microfinance, SME, housing, etc) which

ultimately, in turn, would stabilize the general economy.


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Boom of Banking Industry in Pakistan

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