BANKING INDUSTRY OF PAKISTAN: PERFORMANCES AND CONSTRAINS

Mehmood-Ul-Hassan Khan

for Media Monitors Network (MMN) – July 24, 2004 - http://www.mediamonitors.net/biopakbymuhkhan.html

Banking is one of the most sensitive businesses all over the world. Banks play very important role in the economy of a country and Pakistan is no exemption. Banks are custodian to the assets of the general masses. The banking sector plays a significant role in a contemporary world of money and economy. It influences and facilitates many different but integrated economic activities like resources mobilization, poverty elimination, production and distribution of public finance. It is purchase of car or building of a home banks are always there to serve you better. It is play ground or any educational or healthy societal activity the money of banks nurture them. It is an industrial project or agricultural development of the country the sponsor-ship of banks is very much involved. Banks play very positive and important role in the overall economic development of the country.

Pakistan has a well-developed banking system, which consists of a wide variety of institutions ranging from a central bank to commercial banks and to specialized agencies to cater for special requirements of specific sectors. The country started without any worthwhile banking network in 1947 but witnessed phenomenal growth in the first two decades. By 1970, it had acquired a flourishing banking sector.

Central Banking: Linchpin Of Country’s Banking System

SBP acts as a nucleolus in the financial system of the country. It is the linchpin of country’s banking system. To day, a central bank is the central arch of the monetary and fiscal framework in many countries of the world and its activities are essential for the proper functioning of the economy and critical for the fiscal operations of the government and Pakistan’s banking system is no exemption. Will Roger (1992) described a central bank as one of the great inventions of the 20th century. State Bank of Pakistan was established on the first of July 1948 under the SBP order 1948 as the central bank of the country.

At the start of the century the world had only 18 central banks but today there are more than 173. Initially central banks did not conduct monetary policy or support the banking system. The world’s oldest central bank was established in Sweden in 1668 largely as vehicle to finance military spending. The Bank of England was created in 1694 to finance the expenditure of war. The United States managed without a central bank until early this century. Private banks used to issue own notes and coins. Due to the non-existence of a central bank in USA, banking crises were very common.

No central bank is completely independent in the world. Before the establishment of European Central Bank, the German Bundesbank was the most independent central bank of the world. In the nineteenth century the philosophy of laissez faire dominated, and central banks enjoyed greater latitude compared with earlier and later times. World War I brought that freedom to an abrupt end. After the war there was a desire to return to prewar status, but movement toward this end was precluded by the Great Depression, World War II, and then permanently by the rise of the managed economy. Only in recent years have the trend begun to reverse. The present structure, operation and authority of the SBP originate from the SBP Act 1956. State Bank of Pakistan is entrusted with the prosperity, stability, and growth of the domestic economy. It is sole bank of issue, holder of gold and currency reserves, banker to the government, lender of the last resort to commercial banks and supervisor of the others banks. It is also responsible for National Credit Policy.

In October 1993, complete autonomy was granted to SBP. It was the milestone in the history of SBP. Main reason of its full autonomy is to assume increased independent inputs in macro economic policy making of the country. Autonomy granted to the SBP has strengthened its supervisory and regulatory powers. With the abolition of Banking Council, the multiplicity of regulatory authorities has been removed and SBP has become the sole regulatory authority for the purpose. Now all the DFIs and others financial institutions has also been under the supervision of SBP. The SBP also enjoys extensive powers of qualitative credit control.

State Bank of Pakistan reins the monetary and credit system in Pakistan. The SBP is performing many useful functions like custodian of cash reserve of commercial banks, custodian of foreign currency reserves, bank of rediscount, central clearance, settlement and transfer, and conducting monetary policy for the stability of the entire banking industry of Pakistan.

Comparative Study of Domestic Banking Industry

Nationalization of banks in the seventies was a major upset to domestic banking industry of the country, which changed the whole complexion of the banking industry. With irrational decision at the top all the commercial banks were made subservient to the political leadership and the bureaucracy. Specialized banking institutions were already working in the public sector. The new accountability paradigm changed the business ethics in the banking industry, and with this change started the disaster. Nationalization of banking industry was accompanied by violent changes in the external value of rupee. The commercial banks thus lost their assets management equilibrium, initiative and growth momentum. They ceased to be a business concern and became big bureaucracies. This was accompanied by indiscreet loaning under political pressure. They suffered from three terminal diseases: non-performing loans; higher intermediation cost; and loss of initiative and entrepreneurship. The rise to Labour Unions and Officers Associations made life tough and working conditions ugly to honest, dedicated and industrious workers in the realms of domestic banking industry.

The era of nineties was the climax of privatization, deregulation and restructuring in the domestic banking industry and financial institutions. The Muslim Commercial Bank was the first bank to privatize. Followed by Allied Bank limited, United Bank Limited and now the Habib Bank Limited have been privatized. One thing good for that particular period was the recruitment of fresh officers in the domestic banking industry through well-organized policies of Banking Council. With the decay of Banking Council there was flood of insincere, nonprofessional, incompetent candidates directly appointed/ recruited in all the domestic banks of the country.

Public Sector Commercial Banks

National Bank of Pakistan	NBP
First Women Bank Limited	FWB
The Bank of Khyber	KB
The Bank of Punjab	BOP

The government of Pakistan permitted small private sector banks to operate, which indulged in doubtful policies to promote business. The public sector banking, which constituted the backbone, thus continued to suffer because of their approach, size and carried over liabilities. Mehran Bank is the prime example of that kind of lax banking in the country, which ultimately merged into National bank of Pakistan i.e. last resort of domestic banking industry.

Local Private Banks

Askari Commercial Bank Limited

Bank Al-Falah Limited

Bank Al Habib Limited

Bolan Bank Limited

Faysal Bank Limited

Metropolitan Bank Limited

Platinum Commercial Bank Ltd

Prime Commercial Bank Limited

Saudi Pak Commercial Bank Ltd

PICIC Commercial Bank Limited

Soneri Bank Limited

Union Bank Limited

Muslim Commercial Bank Limited

Allied Bank of Pakistan

Union Bank Limited

Mashreq Bank

In the meanwhile, western banks started entering into the business. They, with the support of ruling elite, concentrated on the big business, leaving the routine business to the local banks. This reduced the profitability of the local banks.

Foreign Banks

ABN Amro Bank

Al Baraka Islamic Bank

American Express

The Bank of Tokyo Mitsubishi

CITI Bank

Credit Agricole Indo Suez

Deutsche Bank

Doha Bank

Emirates Bank

Habib Bank A. G. Zurich

Hong Kong Shangai Banking Corporation

IFIC

Mashreq Bank PJSC

Oman Bank

Rupali Bank

Standard Chartered Bank

Specialized Banks

Zari Tarqiati Bank Ltd.

Industrial Development Bank of Pakistan

Punjab Provincial Cooperative Bank Limited

National Bank of Pakistan: Financial And Market Leader

In the domestic banking industry of Pakistan National Bank of Pakistan possesses a unique position. National Bank of Pakistan was established under the National Bank of Pakistan Ordinance 1949 in Pakistan. National Bank of Pakistan is providing every possible facility to nation’s socio-economic development. It also undertakes Government Treasury operations. It is the largest contributory agent of Government and Semi-Government requirements. It acts as an agent of the Central Bank wherever the State Bank does not have its own branch. It is the largest commercial bank in the country and an agent of GOP, NBP provides a wide range of services, including collection of taxes and deliveries of salaries, pensions to public sector employees. It has lowest rates on exports and other borrowings. NBP occupies a unique position in the financial sector of Pakistan.

It is the only domestic bank of the country, which has been awarded “The Best Domestic Bank” consecutively in 2001, and 2002 by the renowned journal “The Banker UK”. It is also the only domestic bank of the country which had has been compared and included by prestigious Journal “The Asia Week” with other banks in the region. The National Bank of Pakistan is also the first bank which has started a “Foreign Exchange Company” in order to facilitate the general masses, regularize the inflows of foreign money and control the undesirable blackmailing of private foreign exchange companies in the country.

Credit Ratings Of National Bank Of Pakistan (2003-04)

Category	Latest	Pervious
Entity	AAA/A-I	AAA/A-I
Date /Period	April 30,2003	September 20,2002
Out Look	Stable	Stable
Stand Alone	AA-/A-I	AA-/A-I+
Out Look	Positive	Positive

Source: (Japan Credit Rating Agency Credit Rating, 2003)

National Bank Of Pakistan (2003) (Rs. in Million)

Main Financial Data	Rs. in Million
Authorized Capital	5,000
Paid-up Capital	4,103
Shareholders’ Equity and Reserves	27,584
Deposits	395,568
Advances-net	160,990
Investments-net	166,196
Total Assets	471,860
Pre-Tax Profit	9,009
After-Tax Profit	4,198
No. Of Branches	1199
No. Of Employees	13272

The above data confirms the financial superiority, unmatched managerial skills, strategic vision, comprehensive marketing policies, and above all immaculate leadership of Ali Raza the President of NBP in the whole domestic banking industry of the country. It has been achieved with giant and joint team effort of all the workers from top to bottom under the unparallel supervision of the President of the bank who has made NBP a role model to all the domestic banks of the country and rest of the region.

Main Financial Data of National Bank of Pakistan (Rs. in Million)

Year	Total Assets	Deposits	Advances	Investments	Share holder Equity
1999	350,406	294,754	122,559	91,486	10,358
2000	371,636	316,493	140,318	72,609	11,378
2001	415,089	349,617	170,319	71,759	11,959
2002	432,803	362,866	140,547	143,525	14,279
2003	471,860	395,568	160,990	166,196	18,134

The above table reflects NBP’s overall financial strength, greater availability of credit facilities and investment opportunities in the domestic banking industry of the country. Indeed National Bank of Pakistan is customer’s friendly and industrial’s facilitator.

Major Loans Sanctioned By National Bank of Pakistan in 2003-04

Name of the Borrowers	Nature of Financing	Amount Sanctioned
PSO	Project Financing	US$ 100
Ibrahim Fibers Limited	Offshore Financing	US$ 50
Mobilink	Trade & Funded	Pak Rs. 2100 M
ORIX Leasing Pak Limited	Term Loan	Pak Rs. 2000 M
Atlas Group of Companies	Investment & Project	Pak Rs. 2000 M
Chenab Limited	Financing Facility	Pak. Rs. 900 M

It is evident from the above table that National Bank of Pakistan is facilitating the process of industrialization in the country.

Comparative Analysis of profitability of NBP ((Rs. in Million)

Year	Pre-Tax Profit	Post-Tax Profit	Earning Per Share Rs.	Return on Assets	No. of Branches	No. of Employees
1999	520	31	021	0.2%	1431	15541
2000	1032	461	1.24	0.3%	1428	15351
2001	3016	1149	3.08	0.8%	1245	15163
2002	6045	2253	5.49	1.4%	1204	12195
2003	9009	4199	10.23	2.0%	1199	13272

The above table shows that NBP’s profit and income is on the increase from 1999 to 2003. Due to better administrative control and financial discipline in the affairs of NBP, the administrative expenses have been reduced.

National Bank of Pakistan is achieving high standards of customer services and ratios of profitability. Many scientific management techniques are being used to enhance the productivity and good will of the bank in the eyes of common people. National Bank of Pakistan is also introducing corporate culture, risk management tactics, total quality management traditions, and above all concept of good governance in each and every department of National Bank of Pakistan.

In this regard, SAMG (Special Assets Management Group) has been created under the leadership of Shahid Anwar Khan, visionary/precise SEVP/Group Chief, and other seniors executives like truly professional and thorough gentleman Salim Ansar, EVP incharge SAMG (N), Muhammad Tahir Warraich, dedicated SVP-SAMG (N) Incharge Documents/Securities, Tariq Saeed Rana, analytical/visionary VP/Team Leader, SAMG (N), Syed Masroor Hussian knowledgeable VP-Senior Relationship Manager, Syed Qamar-Ul-Zaman unbiased AVP Incharge Litigation-CAD, and many others young energetic professional officers are achieving high standards in all fields. The superior professional expertise, unmatched administrative skills, immaculate managerial wisdom, absolute honesty, dedication, result oriented policies, unparallel marketing strategies, and thorough command over project financing and human relations of entire team has made it apex of recovery, profitability and service. The total recoveries of SAMG (N) are approximately Rs. 832 million in 2003. It also settled accounts with 40 to 45 giant industrial units in the county. It also rescheduled 30 to 35 big projects and revived 40 projects and played its constructive role in order to achieve desirable quick economic revival.

Comparative Analysis of Domestic Banking Industry of Pakistan

Budget2004-05	SBP Report 04	Pakistan’s Economic Survey 03-04
Our banking system is strong with adequate liquidity and interest rates at competitive level, which have resulted in reduced cost of doing business in Pakistan. This year, credit to private sector has stood at an unprecedented Rs 273 billion compared to only Rs 148 billion during the same period last year, showing an increase of 84%. The health of our banking system is constantly improving. Sate Bank has enabled banks to clean their balance sheets through active settlement arrangements and significantly improving the quality of their future lending. Accordingly, the overall non-performing loans of the banking sector have been reduced while there is negligible contribution to NPLs from fresh lending in the last five years. The NPLs of the Banking sector recorded an impressive decline of Rs 5.6 billion during Q2-FY04 to reach Rs 210.1 billion by end-December 2003. There is sharpest reduction in deposit rate among commercial banks.	In QI, 2004 there was a strong increase in net private sector credit. Sharp rise in consumer financing and higher financing requirements for the purchase of cotton is responsible. Net government budgetary borrowing from the banking system also increased in QI-FY04. The growth in net foreign assets [NFA] of the banking system slowed to Rs42.0 billion during QI-FY04 as compared to Rs107.2 billion during QI-FY03. The commercial banks, however, witnessed a reversal from a decline of Rs20.7 billion in QI-FY03 to a small increase of Rs0.5 billion in QI-FY04. Interest rates, initially during QI-FY04 remained under pressure amidst a sharp rise in inter-bank liquidity. The non-performing loans [NPLs] of the banking sector witnessed a rise of Rs3.0 billion during QI-FY04 to reach a total of Rs230.7 billion. Commercial banks continued their progress toward reducing the stock of NPLs and shed off Rs8.7 billion in the QI-FY04. Interest income of the Banking sector surged to Rs 113.9 billion by end Q2-FY-04 recording a rise of Rs 14 billion which was largely attributed to huge expansion in the volume of credit.	Pakistan’s banking and financial sector is much stronger today compared to the recent past and also in comparison to other countries in the Asian Region. Further reforms in the banking and financial sector over the medium term must include: promoting transparency and accountability, observance of international standards, strengthening the financial system through better financial supervision, further privatization of public sector banks as well as divesting their shares through stock exchanges to retail investors. The net foreign assets [NFA] of the banking system were targeted to increase by Rs 130 billion and net domestic assets [NDA] were set to increase by Rs 100 billion. Within the NDA, credit to the private sector was projected to expand by Rs 85 billion while Rs 6 billion was earmarked for public sector enterprises [PSEs]. During July-March 2003-04, the NDA of the banking system increased by Rs 204.4 billion (13.28 percent) against a decline of Rs 45.7 billion (-2.98 percent) in the corresponding period of last year.

There are 17 listed banks in Pakistan 2004. Four banks are still not listed, which are Habib Bank, United Bank, Allied Bank of Pakistan, Dawood Bank. Standard Chartered Bank, Citibank, Deutsche Bank and ABN AMRO Bank are main foreign banks in the country. These four banks continue to enjoy a significant share in the market, both in terms of deposits and advances. All the foreign banks of the country are busy to invest heavily in the field technology and e-commerce in order to overcome branch limitation. All the foreign banks have been busy to introduce new products and idea to grab larger proportion of the local markets. Foreign banks are carrying major proportion of local business in credit cards, consumer finances and housing finance.

Many domestic banks have increased their general standards. Ours is the age of plastic money. Internet-based services are constantly increasing the number of ATM machines, either by installing their own machines or making arrangements with other networks. The number of Debit Cards has also been increasing at an unprecedented rate.

All the domestic and foreign banks vigorously institutionalized consumer financing in the country and earned handsome profits. The borrowing to private sector has also increased which ultimately boasted the profitability of all the domestic banks of the country. In the last 3 to 4 years many domestic banks have been suffering from surplus liquidity crisis mainly due to low demand for credit and slowdown of manufacturing sector in the country. Almost all the banks are now buy to invest in capital markets to increase their exposure in equities. To stop that risky trend the State Bank of Pakistan issued the instructions to follow the Prudential Regulations in letter and spirit and not invest in the capital markets beyond the limits. The domestic banks’s lending under consumer finance and housing finance have also been growing. The analysis of Annual Reports of banks shows that their income from core banking activities has been growing. The other positive point is that there are growing expectations for increase in interest rates.

The growth in advances has started matching growth in deposits. The quality of asset as well liability products have been improving. The ratios of non-performing loans have decreased. The SBP29 Scheme has benefited the banks as well as the borrowers to pay-off their long-standing dues. Bank Alfalah is the first to opt for the listing policy of the government and also offered its share to general public. Two of the state-owned banks, Habib Bank and United Bank, have been privatized but the government still holds a substantial stake in these banks.

Allied Bank of Pakistan was privatized in early nineties. But due to many internal and external reasons it continues to suffer. Some meaningful senior managerial changes would be better at the earliest. Dawood Bank has recently emerged on the banking scenario of Pakistan and it is good addition. The bank has come into existence as a result of acquisition of Pakistan operations of a Sri Lankan bank by a local business group. It is also not listed at the local stock exchanges. Meezan Bank is the first bank of the country, which is carrying complete Islamic banking

Comparative Analysis of Domestic Banking Industry of Pakistan (Rs. million)

Bank	Deposit	Advances	Investments
ACB	51,732	30,035	26,759
BAH	34,240	23,775	18,831
Bop	23,767	6,621	8,295
BB	7,761	3,298	1,328
FB	24,554	21,935	6,842
HBL	328,182	167,523	142,877
KB	2,640	490	2,118
MB	5,079	3,532	856
Metro	28,515	19,444	15,013
MCB	182,706	78,924	89,610
NBP	362,866	140,547	143,525
PCB	21,155	10,876	10,306
PB	14,640	9,016	7,534
SPB	12,341	8,522	6,365
SB	20,545	11,378	9,844
UB	37,760	28,890	11,822
UBL	154,915	74,117	69,385

Comparative Analysis of Earning Per Share of domestic Banking Industry of Pakistan

Name of the Bank	1Q2003	1Q2004	Growth
Askari Comm. Bank	2.16	2.43	13%
Bank Al Habib	0.70	1.44	107%
Bank of Punjab	0.23	1.17	407%
Bolan Bank	0.07	0.10	43%
Faysal Commercial Bank	1.91	1.39	-28%
KASB Bank	0.16	0.05	-68%
MCB	2.21	1.92	-13%
Meezan Bank	0.17	0.38	126%
Metropolitan Bank	1.09	1.68	54%
PICIC Commercial Bank	0.56	1.05	88%
Prime Commercial Bank	0.46	0.76	66%
Saudi Pak Commercial Bank	0.92	0.36	-61%
Soneri Bank	0.60	1.21	102%
Union Bank	0.54	0.62	13%

Gross Assets of Different Domestic Banks of the Country (Rs. in Million) Gross Assets

Bank	2002	2003
ACB	70,313	85,387
BAH	49,437	58,148
BoP	29,525	43,621
BB	10.595	11,726
FB	36,671	47,606
KB	4,037	8,990
MB	6,971	11,102
Metro	41,381	58,982
MCB	235,139	272,324
NBP	432,803	471,860
PCB	27,982	40,134
PB	21,637	29,566
Total	955,907	1,139,446

Administrative Expenses of Different Domestic Banks

Bank	2002	2003
ACB	1,090	1,436
BAH	760	1.062
BoP	900	999
BB	380	375
FB	619	835
KB	204	327
MB	195	255
Metro	513	662
MCB	8,079	7,575
PCB	326	564
PB	512	719

Profit After Tax

ACB	687	1,103
BAH	290	1,012
BoP	284	689
BB	4	-20,139
FB	656	2,151
KB	-114	25
MB	223	214
Metro	430	678
MCB	1,739	2,230
PCB	319	621
PB	176	277

Total Equity of Different Domestic Banks (Rs. Million)

Bank	2002	2003
BB	1,113	1,092
FB	4,120	5,080
KB	593	1,216
MB	1,476	1,637
Metro	2,074	2,753
MCB	6,314	7,726
NBP	14,279	18,134
PCB	1,323	1,784
PB	1,380	1,536

Potential Markets for Domestic and Foreign Banks

A) Islamic Banking

Islamic banking is getting popularity in the country. Many efforts are being made to make it workable in the era of conventional banking. The SBP had initiated the process of converting the conventional banking system into Islamic Banking. Government of Pakistan has initiated a parallel banking strategy of promoting Islamic Banking alongside conventional banking. There is huge scope for Islamic and Modaraba Banking system in the country. MCB, Faysal Bank, Al-Meezan banks and ABAMCO Limited are all ready in the Islamic banking field. Pak-Kuwait Investment Company Limited, which is one of the country's premiere joint venture financial institutions, is launching the first ever Islamic Insurance Company in Pakistan. There is huge market of Islamic banking i.e. $2.5 to 3 billion in the country.

SBP’S Three-Step Strategy

The Government in the near future will ensure a level playing field, and shape Islamic Banking into an attractive endeavor. In order to infuse the market with trust and confidence, the SBP has been proactive, focused and determined in its approach towards Islamic Banking. In the current scenario, they instituted an Islamic Banking Division in SBP.

Islamization of banking is a gradual process and requires time to grow. It is predicted that Islamic banks would be more successful in rural areas. The country's first full-fledged Islamic Bank, which is Meezan Bank, is still a young venture and a premier one. It has been very cautious in its expansion drive. National Bank of Pakistan has started Modaraba banking and trying its level best to enhance its profitability and accommodate the general masses. According to Wall Street Journal (1993) the potential market for Islamic investments to be up to $150 billion and Euro-zone would be central future hub for Islamic Banking. From Middle East to Europe and Asia to Africa i.e. Algeria to Australia, Bahamas to Bahrain, Germany to Guinea, Canada to Cayman Islands, Kuwait to Kazakhstan, Netherlands to Nigeria, Sri Lanka to Sudan, Switzerland, Tunisia, Turkey, Trinidad & Tobago, United Arab Emirates there are huge scope for Islamic banking operations and It is better for NBP to start Islamic banking operations in these areas.

B) Consumer Financing

Most of the commercial banks have ventured into consumer finance. They provide funds for the purchase of consumer durables, computers, automobiles and even housing. Automobiles are covered either through leasing or auto loans, being undertaken by leasing companies and mobarabas or separate divisions within financial institutions. Housing finance is still mostly confined to two companies, namely House Building Finance Corporation and International Housing Finance Limited. Habib Bank, ABN AMRO Bank, PICIC Commercial Bank and National Bank of Pakistan are busy in consumer banking. Ours is the age of “Financial Derivatives” and consumer banking is one of them, which has globe market of over US$30 to 35 trillion. National Bank of Pakistan has started its consumer banking operations through out the country.

National Bank’s Cluster of Consumer Banking

It is great opportunity for NBP to monopolize the huge potential market of common consumers in the country and to increase the profitability of the bank. It will enhance the overall economic activity, industrial productivity in the country and reduce slackness in the consumer market. Insurance& Pension Funds, (Rs 70 billion for armed personnel and domestic flouring industry of insurance) Sales Finance, Mortgages, and Affinity Loans are very common in many ASEAN countries and National Bank of Pakistan can be benefited from the successful experiences of other countries in order to grab the local markets. Steps ought to be initiated to mobilize the net rural saving, which is approximately Rs. 20 to 25 billion. The senior management of NBP should take lessons from Grameen Bank of the Bangladesh, Agricultural Cooperatives of Thailand, Bank Ryat of Indonesia and ACCION International of Latin America to reduce poverty through extended facilities of micro-credit.

Some of the leading manufacturers entering into such agreements are LG, Samsung, Philips, Siemens, Waves, PEL and Skyflame. Inbox Business Technologies, a leading assembler of personal computers, has also signed co-branding agreement with some leading financial institutions. Some of the vendors who have also signed co-branding agreements include, Home Appliances and IMPL and National Electric Company.

The mark-up rates charged by all the banks and financial institutions are high as compare to general verdures. The general perception is that payment from financial institutions takes longer. Another key issue has been the lengthy and cumbersome credit approval system. Financial institutions attribute this to the lack of available data about the consumers. It has been difficult to verify the authenticity of national identity cards, addresses given on the cards and actual location of the client, certification of income of the client and the credit worthiness.

C) Housing Financing

Housing is the largest single asset class in Pakistan with an estimated worth of Rs.1700 billion. It is estimated to be less than 1% of the GDP because there is no vibrant system of housing finance. The total current housing stock in Pakistan is valued at Rs1700 billion and comprises 21 million units. Pakistan is facing shortfall of 6.5 million housing units and this backlog is increasing by 0.4 million annually. Millions of people are living in Katchi Abadis in Pakistan, mostly devoid of basic necessities. Potential for housing finance is currently estimated at around Rs24 billion per year of which the component of mortgage finance is Rs15 billion while the component of micro-financing for housing is about Rs9 billion. Urban demand for houses is growing at the rate of 8 per cent. The demand for urban pucca houses for normal growth, replacement and upgrading etc is estimated at 155,000 units per year costing around Rs64 billion. In USA, it is 53%, in EU 36%, in Malaysia 21% and in Iran 3%. Rich countries as a whole, where investments in housing far exceeds that in stocks and shares, individuals are estimated to own $23 trillion in equities and a reckoned investment of $40 trillion in property. Policy makers are striving to turn marginalized housing finance into the mainstream banking activity and NBP has already launched its product “SAIBAAN to open a window in housing financing.

Most of the banks have launched the Consumer Banking Operations but only a few seem to be serious. It is strongly suggested that instead of banks approving credit for each individual, the manufacturers may be extended credit lines, whereby they also take the responsibility of collection of monthly installments. Some of the banks that have issued credit cards, encourage cardholders to buy consumer durables using the card and then transfer the liability to easy installment option. While the cardholder saves in terms of mark-up, the maximum limit is the same as for the credit card. Credit insurance has also become a norm in banking business in Pakistan. For example credit cardholders are paying insurance premium, if they are utilizing a revolving credit by just exercising minimum payment option. This is primarily to hedge the risk in case of death of the borrower. The same strategy may also be adopted for expanding consumer finance business.

Though, many local and foreign banks have entered into consumer finance, its quantum is still a very small percentage of the total deposits. Only a limited segment of population has been benefiting, which is mostly confined to urban areas. But it is aslo reality that majority of the population living in rural areas. It is strongly suggested that the SBP should make it mandatory for the banks to disburse at least two percent of their total deposits under consumer finance every year through out the country and specially in the rural areas.

D) Micro-Credit Financing

New philosophy has been incurred especially in the developing countries that “Small is Beautiful” because globalization and free market system has provided upper hand to developed countries. At the same time, natural tendencies in the free-market system have brought about an enormous concentration of economic gains in very few hands. Large loans imply few beneficiaries, big loan defaults and more income disparities. Converse is true for small micro-credit loans. Beauty originates from within. Similarly, micro-credit program focus on the people with personal commitment to improve their lot, do honest labor and have genuine need for small loans.

Due to tough economic conditions and failure of giant industrial enterprises now banker allover the world start think to shift their focus from big loans to small loans and from industrial financing to consumer financing. Micro -credit is playing useful work to alleviate poverty and economic revival in many part of the world like Hungry, Viet Nam, Costa Rica, Chile, Philippines, Bangladesh and Zambia.

After Khushhali Bank and the First Micro-finance Bank operating with 35 and 10 branch networks respectively, a number of private sector micro-finance banks are in the pipeline with a motive to growing rate of poverty in Pakistan.

There are great opportunities for all the banks in the country to grab the markets of micro financing especially in the rural areas because majority of people live in villages. Micro-finance can easily be used for the development of agricultural and agro based small industries. Bank for Agriculture and Agricultural Cooperatives of Thailand; Bank Ryat of Indonesia and Grameen Bank of Bangladesh exemplify the success of micro credit institutions in Asia.

All the domestic banks should start their micro financing operations in order to increase their shares of profitability and good will in the eyes of common people. It is strongly suggested that all the domestic banks of the country and especially National Bank of Pakistan should focus the following potential areas to earn profit and to reduce increasing menace of poverty.

• Establishment of Cattlemen’s bank to extend financial and technical support to the livestock and dairy farmers on the model of Council’s activities in Egypt and Grameens Bank in Bangladesh

o Boost micro credit for agriculture and rural women (More than half of the country’s population belongs to womanhood

o Promoting small entrepreneurial activities in fisheries and seafood by providing micro-credit

o Small business horticulture and food processing pursuits

o Small and Medium Business Development (It employs more than 81% of the industrial labour force. It accounts for 5.02% of GDP, 28.5% of value added in manufacturing sector. It earns 18% of Pakistani total exports. The SMEs accounts for between 55 % and 80% of total employment in Western Europe, Japan, and US. They account for 45%, 48% and 65% of the economies of the US, Germany and Japan respectively in terms of contribution to economic output. Micro financing of the banks can boast the growth of SME in Pakistan, which can definitely, increase GDP and enhance the living standards of the general masses.

National Bank of Pakistan has big advantage of having extended branch operations mechanism in the rural areas of the country. It is great chance for National Bank of Pakistan to play as financial leader in micro financing and also actively participate to reduce the alarming ratios of poverty and unemployment.

FRUITS OF MICRO CREDIT

Problems of Domestic Banking Industry of Pakistan

a) Knowledge of Risk Management is Missing

The main purpose of financial and banking organization is to create valuable system by interacting with its environment, customers, constituents, suppliers, technology, competition, economy, government, etc. A valuable system is created by the conversion of available resources i.e. human, financial, physical, and intangible assets into goods and services that fulfill the needs of the customers and save the best interests of the banking and financial organization. Risk management performs all these diversified but integrated work to achieve maximum out-put. Managing risk is actually managing the organization: planning, organizing, directing, and controlling organization systems and resources to achieve objectives. Managing risk must come from within and act to change the organization and its response to changes in the environment.

Now many domestic banks are hiring experts of risk management to secure their precious assets. National Bank of Pakistan has also created risk management group at head office and as well as regional level to save the best interests of the bank and enhance the chances of investments.

b) Total Quality Management: Paradigm Shift

Ours is the age of cutthroat competition, scarcity of resources, technological advancement, integration of financial services, expansion of economic markets and cultural diversity. In these complicated and conflicting financial and economic scenarios the need of TQM in the ranks of domestic banking industry is indispensable. The middle management should need to have basic understandings about complicated management processes, crisis management tools, marketing/product strategies, financial and treasury management techniques, financial discipline, soundness and transparency of banking system, human resource administration and above all genuine leadership qualities to adequately operate within a highly sensitive and complicated industry.

There is urgent need of having TQM in the realms of banking industry of the country. At the dawn of WTO and increasing chances of investment banking among the SARRC countries the TQM is the need of the hour, Our commercial banks must pay attention to this shift and start thinking strategically for providing high quality products and services to customers. According to a study from Business Communications Company, Inc. The Changing Global Commercial Banking Industry Structure, total commercial banking assets are expected to climb at an average annual growth rate [AAGR] of 7.1% from $6,772 billion in 2001 to $9,537 billion in 2006.

The banking industry should determine where improvement is needed, how service can be improved and where operating system breakdowns occur, why they occur and how they can be avoided.

Areas Where Improvements is to be needed

· Internal & External Audits (concept of financial discipline, accountability, good corporate governance, professionalism and impartiality)

· Communications Skills. No ambiguity should be left. Clear and comprehensive instructions

· Transparency in all matters especially in financing

· Aggressive marketing strategies in retail and commercial banking

· Institutionalization of Human Resource Management (best man should be posted to best assignment, refreshing courses, seminar on emerging banking and financial problems etc. etc.).

· Humanistic administration, because human is supreme than any entity.(promotion policies, award & reward) etc. etc.

· Research and Development facilities (Domestic market research, economic analysis, strategic insight of major economic and financial accords, international markets knowledge, rigorous planning and development, loss & prevention mechanism)

· There should be central compliant cell in every bank in the country in order to reduce people’s complaints and foster the ratios of productivity.

· Commonness of E-commerce and Internet bank should allow flourishing in the domestic banking industry of the country.

· Scope of Investment Banking is very much there and bright as said by finance minister of the country. Concrete efforts should be made to initiate investment-banking operations in the region.

· Money laundering and white-collar crimes are on the rampant. Aggressive and comprehensive mechanism should be set-up to save the domestic banking industry of the country.

· General working conditions ought to be improved

President of NBP S.A. Raza has already initiated many result-oriented policies to make NBP at par with any international Supervisory banking standards. The corporate governance and good governance must be implemented in each and every affairs of the bank. It is feared that on the dawn of WTO and start of SAFTA many domestic banking industry may suffer.

Source:

by courtesy & © 2004 Mehmood-Ul-Hassan Khan

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