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.
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.
|
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.
|
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.
|
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 |
|
Zari Tarqiati Bank Ltd. |
|
Industrial Development Bank
of Pakistan |
|
Punjab Provincial
Cooperative Bank Limited |
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.
|
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 |