GREENWICH UNIVERSITY

FINANCIAL INDUSTRY IN PAKISTAN

Introduction
Banking and Financial services sector in Pakistan comprises
the commercial banks and the non-banking financial
institutions, including the development finance
institutions (DFIs), leasing companies, modarabas (Islamic
Mutual Funds) and investment banks !hese are controlled
and regulated b" the #tate Bank of Pakistan (#BP) Pakistan
is in the process of adopting an Islamic (#hariah)
financial s"stem, under $hich interest-based banking is not
allo$ed %o$ever, this has not been made into a la$ as
"et, and e&ists onl" on paper, and most banks provide an
anticipated profit rate in advance 'overnment of Pakistan
('(P) has introduced various reforms in the financial
services sector enhancing the level of autonom" en)o"ed b"
the #BP !he number of banks operating in Pakistan has
increased, $hich in turn has resulted in increased
competition !he banking sector, in general, has sho$n good
progress during the last fe$ "ears During previous five
"ears, the combined total assets of domestic banks, sho$ed
an average annual increase of ** percent, $hile combined
deposits have recorded an increase of *+ percent per annum
Purpose
!his paper aims to provide an in-depth stud" regarding the
financial industr" in Pakistan, more specificall" about
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increase in the combined total assets and deposits of
domestic banks and, and also strives to identif" the
challenges and opportunities facing the industr" toda" to
gauge if the sector is $orth" of investment
Scope
!his stud" encompasses various dimensions of the financial
industries including commercial banks and the non-banking
financial institutions ,lthough efforts have been made to
give the most accurate and comprehensive information
possible Data has been collected from $ebsites, maga-ine
and fe$ books
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Findings
,ll private sector banks $ere nationali-ed b" '(P in ./+0
#ubse1uentl", financial reforms $ere introduced in .//2 to
liberali-e this sector Plans $ere announced to privati-e
state-o$ned banks and DFIs, and to allo$ the establishment
of private domestic banks #ince the latest liberali-ation,
t$o banks and three DFIs have been privati-ed, and .0 ne$
private banks have started their operations 3onse1uentl",
private banks pla" a significant role in the banking
industr" !he #tate Bank of Pakistan (#BP) holds complete
autonom" in administrative matters, and has introduced
guidelines to enforce internationall" accepted standards on
capital ade1uac" %o$ever, implementation of these
guidelines is still far from completion
In total fort"-si& commercial banks operate in Pakistan,
out of $hich t$ent" five are local and t$ent" one are
foreign-o$ned !he number of branches for Pakistani banks,
stand at 4,5/+ and for foreign banks at 4+
Current Conditions
Financial reforms have reduced government6s intervention in
the operations of financial organi-ations for economic
reasons !he autonom" granted to #tate Bank of Pakistan,
in Februar" .//0, $as further strengthened in 7anuar" .//+,
and it $as given additional authorit" to conduct the
monetar" polic" of the countr" In addition to managing
the monetar" polic", #BP also oversees the entire financial
s"stem and has institutionali-ed the procedure for the
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appointment of 3hief 8&ecutive (fficers (38(), and Board
members of the 93Bs, and DFIs ,ll banks:DFIs are facing
stiff competition to attract ne$ customers ;ith the
privati-ation program that began in Pakistan in .//., t$o
of the five 93Bs and three DFIs $ere privati-ed, and eleven
ne$ private banks $ere set up ;ith a net$ork of 4,5/+
domestic branches and 4+ foreign branches, competition
among banks is getting tougher and profit margin lo$er
,long $ith the gro$th in si-e, the banks are no$
incorporating innovative approaches to their traditional
commercial banking operations, keeping in vie$ the changing
demand of time, and emphasi-ing more on personali-ed
service, electronic funds transfer, sophisticated financial
products such as electronic banking, auto-teller machines
and evening banking
!he backbone of Pakistan6s domestic financial s"stem is
still provided b" the five ma)or domestic commercial banks,
$hich are %abib Bank <td, 9ational Bank of Pakistan,
Muslim 3ommercial Bank, =nited Bank <td and ,llied Bank
<td !hree 93Bs, %abib Bank, 9ational Bank and =nited Bank,
despite the severe financial crunch, are still the market6s
dominant pla"ers, controlling about 5. percent of the
entire banking sector deposits and 52 percent of advances
Domestic Banks: Before the liberali-ation of the
financial sector in the earl" .//2s, there $ere no local
private banks in Pakistan In the industr", $here earnings
largel" depended upon alread" limited spread, service $as,
and still is, the single most critical success factor
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,t present there are .0 domestic private banks operating in
Pakistan !he domestic private banks, despite tough
competition from 93Bs, denationali-ed commercial banks and
foreign commercial banks, have sho$n a phenomenal gro$th
over the past five "ears
!he combined total assets of domestic banks have increased
from >s ++.? billion in .//+ to .,@.@? billion in *22*,
sho$ing an average increase of ** percent annuall"
#imilarl", combined annual deposits have recorded an
increase of *+ percent, from >s ?.4/ billion in .//+ to
.,2@@ billion in *22* ,dvances recorded an annual gro$th
of *+ percent from >s ./*4 billion in .//+ to >s @0.
billion in *22* 3apital ade1uac" ratio is 4 percent for
domestic private banks compared to less than 5 percent for
93Bs
Private Banks generall" have an edge over the 93Bs ,lmost
all of these banks have been patroni-ed b" big industrial
groups, $hich deal e&clusivel" $ith these banks
,dditionall", the" provide better customer services,
maintain lo$er overheads and follo$ relativel" more prudent
lending policies than the government-o$ned banks, and are
thus more profitable
Denationalized Banks: !$o banks, Muslim 3ommercial
Bank (M3B) and ,llied Bank <td (,B<), $ere privati-ed
during the banking reforms and privati-ation process M3B
$as taken over b" a local business consortium in .//2 and
,B< b" an emplo"ees6 group in .//. ,fter privati-ation,
M3B6s net assets increased from +5 billion in .//? to .?5
billion in .//@, deposits from @? billion to ..? billion
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and advances from ?. billion to 54 billion, accordingl"
,B< also fared 1uite $ell during the same period
Its net assets increased from 0* billion in .//? to 54
billion in .//5, deposits from ?. billion to 5. billion and
advances from .4 billion to */ billion !he profitabilit"
of these banks is better than that of nationali-ed banksA
therefore, '(P is planning to privati-e other nationali-ed
banks as $ell %abib Bank <td, the largest Pakistani bank,
is currentl" being restructured for eventual privati-ation
Foreign Banks: !he t$ent" one foreign banks operating
in Pakistan are pla"ing a significant role b" incorporating
ne$ technologies and providing better 1ualit" services
Policies of privati-ation, foreign e&change reforms and
structural ad)ustments, have increased the inflo$ of
foreign resources through direct and portfolio investment
Most foreign banks in Pakistan have branches onl" in big
commercial:industrial centers, unlike local banks $hich
also operate in small to$ns In trade financing, the role
of foreign banks is even more significant, as appro&imatel"
?2 percent of the total trade of the countr" is transacted
through them Ma)or portion of the trade financing is for
importers to establish letters of credit In .//. $hen '(P
allo$ed resident Pakistanis to open foreign currenc"
accounts, man" banks directed their efforts to$ards the
previousl" untapped consumer and retail banking sector
9e$ products such as credit cards, housing finance and
automobile finance $ere introduced Foreign banks also
pla" an important role in assisting local corporations to
access international capital markets !he total deposits
of the foreign banks increased from >s +00 billion in
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.//+ to >s *.?0 billion in *22* Furthermore, their
advances increased from >s ?0* billion in .//+ to >s .22
billion in *22* sho$ing an annual increase of ?+ percent
Development Finance Institutions (DFIs): DFIs face
problems of $eak economic health and lo$ profitabilit", due
to lo$ productivit", high overhead e&penditures, over-
staffing and large number of loss-making branches,
resulting in high intermediation costs $hich make their
financing more e&pensive relative to other financial
institutions , serious problem facing DFIs is the
liabilit" of non-performing loans, $hich has adversel"
affected the overall viabilit" of the entire banking
s"stem !he total amount of non-performing advances of
banks:DFIs of >s . million and above increased from >s
..?* billion from 7une *22* to >s .*4 billion b" the end
of 7une *22* or .45 percent of the total loan portfolio
(n 7une ?2, .//+ the default to total loan portfolio ratio
for the DFIs $as *?? percent, follo$ed b" domestic banks
at *2+ percent and foreign banks at 0* percent ,mong
domestic banks, the default ratio in the case of 93Bs
stands at *44 percent, for provincial banks @@ percent
and for private banks 5* percent !o improve the recover"
of non-performing loans, #BP has introduced several
initiatives, to assist the defaulting companies and non-
performing industries %o$ever, the desired results have
not been achieved, due to political influences, ineffective
monitoring and slo$:$eak court procedures !o speed-up
legal action against the defaulting companies, #BP has no$
amended banking court la$s and has e&panded the number of
banking courts from .2 to 05 B" March *22., over 0?,222
cases involving an outstanding amount of >s @@ billion
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$ere filed b" the banks:DFIs b" March *22. 3ases
involving >s ..+ billion $ere presented for e&ecution and
>s ..5 billion $as released
Investment Banks (IBs): !he first investment bank $as
listed on the Barachi #tock 8&change in ./5+, and .@
investment banks are presentl" operating in Pakistan
Ma)or activities of these investment banks are corporate
financing, trade financing, treasur" services, securities
under$riting and merchant banking !he performance of
investment banks has generall" been satisfactor" Deposits
of investment banks must be of one month duration in local
currenc" and minimum three month duration in foreign
currenc" Investment banks are not allo$ed to deal in
foreign e&change
Leasing Companies (LCs): <easing is no$ a popular
mode of financing in the countr" !here are */ leasing
companies operating in Pakistan $ith market capitali-ation
of over Pak >upees 4,*4+ million $hich constituted *25
percent of total market capitali-ation <easing companies
provide a $ide range of e1uipment, products and appliances
such as industrial e1uipment and machiner", motor vehicles,
office e1uipment and computer e1uipment !he recover" rate
of leasing companies stood at appro&imatel" +0 percent at
end 7une *22*
<easing has gro$n at about *2 percent in the last five
"ears and is e&pected to see a dramatic reduction in this
gro$th rate because of funding constraints faced b" this
sector ;ith an interest margin of around ? percent, the
rise in =# interest rates and the increase in the local
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for$ard cover fee, leasing companies ma" find it hard to
mobili-e lo$er cost funds from abroad in future 3ompanies
having access to local as $ell as foreign credit lines and
backed b" reputable groups could outperform the market but
these are fe$ and far bet$een
!he gro$th in leasing companies has come in the backdrop of
their abilit" to provide mid-term financing to the
industrial sector !he concept of leasing gained acceptance
and as a result a number of companies ventured into this
field
%o$ever competition is strict and not )ust from banks but
from leasing modaraba and no$ term finance certificates
being introduced b" corporate <ess than half of the
leasing companies so far have permission to issue
certificates of investment and this further hampers their
abilit" to mobili-e funds
,nother ma)or problem faced b" leasing companies is that of
mismatching maturities <easing companies $ill have to
maintain a sustainable gro$th rate for $hich the" $ill need
a perpetual flo$ of funds Mobili-ation of funds is the
main issue facing leasing companies In the prevailing
circumstances, it $ill be a testing time for the lessors
Innovative thinking is re1uired to come up $ith ne$
pro)ects for fund raising ,sset scrutini-ation as a
vehicle to induct funds in leasing companies has not
traversed be"ond the conceptual stage
,s is the case $ith modarabas, if leasing companies are to
survive, the" $ill need a change in the regulator" and
ta&ation frame$ork !he" do not have the customer base that
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can ensure the gro$th of the industr" as a $hole %o$ever,
$e believe that as the concept of lease financing gains
$ider acceptance, a trend that has seen favorable gro$th in
the past fe$ "ears, the conditions for the sector should
improve
=p until no$, all e"es have been on the 93Bs and their bad
business practices !he leasing companies, in general, save
a fe$ e&ceptions are no prudes and for this reason, the
sector no$ has a core group of companies, $hich have an
established clientele $hile the rest are groping in the
dark
Modaraas: 3onceptuall" and in practice Modaraba is
the Islamic version of a Mutual Fund, managed b" Fund
Managers, $here o$ners agree on a profit:loss sharing
%istoricall" Modarabas possess the best performing
financial sector stocks but $ithout the financial backing
or access to regular funding lines from Islamic banks the"
are finding it difficult to sustain earnings gro$th and
operating income momentum #ince .//*, modarabas have been
facing a shortage of funds because of the #BP6s regulation
$hich directs banks Cnot to issue an" guarantees, nor
assume an" obligation $hatsoever in terms of deposits, sale
of investment certificates, issue of commercial papers or
borro$ing of an" non banking financial institution
including investment banks, leasing companies, modarabas
and development finance institutions, etc in respect of
resources mobili-ed b" them,C
,t the same time Modarabas like other investment financial
institutions, have suffered a lot on their stock holdings
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due to the belo$ average performance of the stock markets
!his aspect immediatel" comes to light $ith a stud" of the
financial statements of modarabas
!he ma)or sources of funds are Morabaha and Musharika
financing In Morabaha financing the modaraba sells it6s
assets to a bank or other financial institution $ith an
agreement to repurchase at a higher price at some fi&ed
time in the future In Musharika financing the modaraba and
the concerned part", for e&ample a bank, each contributes
capital on a profit and loss sharing understanding on the
basis of contributed capital !he modaraba provides around
*2 percent capital up front $ith the bank generall"
providing the rest
Modarabas do not have the leveraging room that is allo$ed
to banks and the recent 3<, ruling that Modarabas that fail
to pa" a dividend in a three "ear period $ill be penalised
and not allo$ed to issue >ight shares has further reduced
earnings potential ,long $ith this has come the
restriction that an" modaraba or leasing compan" trading at
less than *5 rupees $ill not be allo$ed to issue bonus
shares ,s one pla"er in the leasing industr" puts it, C
$h" this discrimination, the rule should be across the
board or not at allC
Modarabas, forced to pa" out regular dividends do not have
the earning potential of banks and thus despite of
substantial gro$th in the earl" /2s have failed to increase
their credit ratings (f course the" are not allo$ed the
leverage in accumulating credits through charging or pa"ing
interest like banks $hich naturall" puts them at a
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disadvantage !he increasingl" a$are investor $ill
definitel" keep such factors in mind
!here does not appear to be too much scope for this mode of
CIslamic financingC in Pakistan $here commercial banks are
alread" fighting for breathing space 52 "ears is a long
time Modarabas cannot e&ist in their present form, or the"
cannot e&ist in the present regulator" and ta& frame$ork
=nless there is some kind of improvement in the
environment, Modarabas appear to be headed to$ards
e&tinction !heir onl" hopes are the pickings left b"
banks, customers that the reputed banks believe are a risk
not $orth taking and such a market is simpl" not enough to
sustain the gro$th of an industr"
Market Pro!ile
Commercial Banks: !hirt"-nine companies have been
issued licenses to operate as banks in Pakistan !heir
ma)or activities includeD
- >etail banking
- #hort term financing
- !rade financing
- Discounting of bills
- Financial advice
- Pro)ect financing
- =nder$riting of e1uit" and debt issues
- Portfolio management
- 3ustodial services
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Development Finance Institutions: #i&teen DFIs
operate in Pakistan !heir ma)or activities include
- Pro)ect financing
- =nder$riting of e1uit" and debt issues
- <easing
Investment Banks: #i&teen investment banks operate in
Pakistan !heir ma)or activities includeD
- #hort term financing
- !rading in e1uities and debt securities
- (ffering portfolio management services based on
investment in e1uities and government securities
- =nder$riting of e1uit" and debt issues
Leasing Companies: !$ent"-nine leasing companies
currentl" operate in Pakistan !heir ma)or activities
includeD
- <easing
- 81uit" portfolio management
- =nder$riting of e1uit" and debt issues
Modaraas: Fift"-three modaraba companies have
received permission from #BP to conduct business !heir
ma)or activities includeD
- <easing
- 81uit" Portfolio management
- !rading of commodities
- <ending under Islamic financing arrangements
- =nder$riting of e1uit" and debt issues
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)*r+,t A--,--.,nt
!hough the econom" of Pakistan is passing through a
difficult phase and the financial sector is operating in an
environment of increasing competition, both from local and
foreign banks and financial institutions !he financial
services sector still offers good opportunities in consumer
banking, corporate bonds, under$riting of e1uit" issues for
privati-ation, refinancing of =# e&ports to Pakistan
under letters of credit and advisor" services for due
diligence and pro)ect feasibilities ,dditionall" )oint
venture and technical relationship in the leasing sector is
also possible
Co./,titi0, Situ*tion
Consumer Banking: 3onsumer banking in Pakistan is
largel" underdeveloped !here is no tradition of lending
to small individual consumers, and purchases of
automobiles, housing, and consumer goods are generall" made
on a cash basis Foreign banks generall" have sufficient
lucrative business in the corporate sector to absorb their
limited credit reserves %igh interest rates combined $ith
high start-up costs are ma)or impediments in the
development of consumer banking 3ommercial banks face
considerable competition in attracting deposits from
individuals or small investors In contrast, the '(P6s
national saving scheme offers attractive rates of return
(appro& .@ to .4 percent annuall") on .2-.5 "ear fi&ed
accounts, $hich banks find difficult to match >ecentl"
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banks and other financial institutions have introduced
innovative schemes to attract deposits !hese schemes
offer pri-es on short and long term fi&ed deposits, through
luck" dra$s !hese pri-e schemes have generated >upees
.@? billion of ne$ deposits from (ctober to mid December
.//4 alone
"#olesale$Corporate Banking: !he corporate bond
market is still in its infanc" in Pakistan Fe$ companies
such as Pakistan !elecommunication <td (P!3<) and ;ater
and Po$er Development ,uthorit" (;,PD,) introduced
corporate bonds for general public and received good
response but no similar initiative $as taken b" other
companies Market for corporate bonds needs to be
developed as it $ill offer greater opportunities to the
corporate and investment banks
Market Position o! %merican Banks: ,merican banks
en)o" a good market position 3ollectivel" =# banks hold
appro&imatel" / percent of all commercial banks6 assets
,t present, three ,merican banks are operating in PakistanD
,merican 8&press BankA Bank of ,merica and 3itibank
'enerall" ,merican banks are selective in their clientele
and target reputable and established companies and
individuals, resulting in a more focused offering and
personali-ed service 3itibank is the largest foreign bank
operating in Pakistan $ith a total e1uit" investment
e&ceeding =#D 42 million It emplo"s over +22 people and
provides comprehensive range of innovative financial
services to over .22,222 customers It is also one of the
largest ta& pa"ers in Pakistan6s corporate sector Bank of
,merica started its operations in Pakistan in ./@.
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Presentl" it has branches in Barachi, <ahore and Islamabad
and emplo"s over ?22 people Bank of ,merica provides
versatile financial services such as depositor" services,
corporate banking, investment banking, treasur" services,
trade financing and global pa"ment services In December
.//+ its assets e&ceeded Pak >upees ./+ billion, deposits
Pak >upees .@ billion and advances Pak >upees .2 billion
,merican 8&press Bank started its operation in Pakistan in
./40 and has branches in <ahore, Faisalabad and Islamabad
in addition to Barachi In addition to banking services,
,merican 8&press also provides travel related services in
Pakistan In December .//+ its assets e&ceeded Pak >upees
.55 billion, deposits Pak >upees .*@? billion and
advances Pak >upees @@? billion
End U-,r An*12-i-
Structure o! Bank Deposits: In December *22* total
domestic deposits $ith scheduled banks $ere Pak >upees
//@@ billion $ith the follo$ing breakupD
!"pe ,mount #hare
(>s in billions) (Percent)
3urrent deposits *.0+. *.50
3all deposits *20* *25
(ther deposit accounts ?0?/ ?05
#aving deposits 020/? 02@?
Fi&ed deposits ?**.+ ?*??
#imilarl" the break-up of advances in December *22* b" t"pe
of borro$er is as underD
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!"pe ,mount #hare
(>s in billions) (Percent)
'overnment 5*/4 45*
Public sector enterprises 5.*/ 4*5
Private sector (Business) 00*2. +.2@
!rust Funds E
9on Profit organi-ations ?/@ 2@0
Personal +20. ..?*
(ther .02 2*?
(not ade1uatel" described)
)*r+,t Acc,--
!here are no restrictions on ne$ foreign banks coming in
Pakistan %o$ever, permission to operate is considered on
a reciprocal basis #tate Bank of Pakistan grants
permission to operate in Pakistan to onl" those foreign
countries $here the la$ provides same facilities to the
Pakistani banks as Pakistan provides to foreign banks and
,merican banks 1ualif" these basic criteria =# Banks
interested in operating in Pakistan, must have branches in
at least t$o countries, other than the =# !he #tate Bank
of Pakistan (#BP) is the central bank and has the authorit"
to grant permission to banks interested in setting up
operations in Pakistan ,pplications should be submitted
on a prescribed form issued b" #BP !he form, enclosing
re1uired information such as annual reports for last five
"ears, bio-data of directors of bank, authori-ation from
the Federal >eserve Bank in the =# to establish branches
outside =#, should be submitted to #BP
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Conclusion
, total of fort" si& commercial banks, including t$ent" one
foreign banks, are operating in Pakistan ,dditionall",
si&teen Investment Banks, t$ent" nine <easing 3ompanies and
fift" three Modaraba 3ompanies provide a mi& of financial
services !hree ma)or nationali-ed commercial banks (93Bs)
are still the dominant pla"ers in the market, controlling
about fift"-one percent of the entire banking sector
deposits and fift" percent of advances 93Bs and some DFIs
in the public sector are e&periencing difficulties because
of over-staffing, inefficienc" and large non-performing
loans '(P is taking steps to recover these loans, b"
offering incentives to defaulters Bureaucratic inertia
and political clout, of some of the defaulters, is a ma)or
impediment in this effort (pportunities for ne$ ,merican
banks e&ist in consumer banking, corporate bonds,
investment banking, leasing and housing finance sectors
'ood reputation en)o"ed b" the e&isting ,merican banks $ill
be helpful for ne$ entrants #ome challenges, ho$ever, do
e&ist in the form of $eak economic conditions in Pakistan
and the turnaround possibilities in 93Bs through
privati-ation
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Biliograp#&
Maga-ine, Institutes of Bankers, PageF4, .
st
7une *22?
,uthorD #hukla, Financial accounting, 3hapterF0,5,@E+
httpD::strategisicgcca:##':dd+?+*/ehtmlG
httpD::$$$statebankofpakistancomG
httpD::$$$canadareortcomcaG
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