Boom of Banking Industry in Pakistan

BOOM OF BANKING INDUSTRY IN PAKISTAN
Saeed Ahmed Sheikh

Sequence of Presentation
3
 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
4
Introduction
Introduction
5
 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 country’s wealth
but they also work as tool for development by facilitating
(through lending & consultation) prudent investments in
different sectors (preferably in new sectors).
Introduction Continued
6
 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

Introduction Continued
7
 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 gauge
i) 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.
8
Historical Background of Banking in Pakistan

 FORMATIVE PHASE (1947-1948)

 Pakistan’s banking system started from a scratch.
 From June 3rd 1947 to June 30th 1948, number of branches

decreased from 487 to 195.
 In 1947, Pakistan’s 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 India
led 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
10
 PHASE OF EMERGANCE (1949-1958)

 Pakistan’s 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) to Rs.
238.94 crores (in July 1958). Total bank credit rose from
Rs. 19.78 crores to Rs. 122.55 crores over the period.
Source: S.A. Meenai, ‘’Money & Banking in Pakistan”, Royal Books, Karachi, 1977.
Continued
11
 PHASE OF GROWTH (1959-1970)

 Pakistan’s banking system witnessed a remarkable growth.
 In 1959, United Bank was established.
 Several new banks were added to the list of scheduled

banks; 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
12
 PHASE OF STRAINS (1971)

 In the wake of political disturbances during 1971-72,
Pakistan’s 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
13
 PHASE OF NATIONALIZATION (1972-1977)

 After the separation of East Pakistan, the new
government introduced far-reaching banking reforms in
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 the ownership of
Government with effect from 1st January 1974.
 The number of bank offices rose to 5187 in 1977; the
expansion was particularly rapid in rural areas of the
country.
Continued
14
 PHASE OF HEALING REFORMS (1978-1996)

 Nationalization affected the performance and efficiency of
the banks in the long run.
 Government revised nationalization policy and consequently
the Banks (Nationalization) Act, 1974 was amended in 1991.
 As first step twenty three banks were allowed to work (10
banks belonged to domestic sector and rests were
international/foreign banks).
 The process of denationalization/privatization of
Nationalized Commercial Banks (NCBs) was also started with
the privatization of MCB and ABL.
Continued
15
PHASE OF STRUCTURAL REFORMS (1997-2002)

 In 1997, SBP directed banks to submit their annual accounts on
new formats of CAMELS & CAELS as per international standards.
 Banking Companies Ordinance (1962) and the State Bank of
Pakistan Act (1956) were amended.
 The Banking Tribunal Ordinance (1984) and Banking Companies
(Recovery of Loans) Ordinance (1997) were repealed 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 the Pakistan
Banking Sector Restructuring and Privatization Project (PBSRPP).
Boom after Liberalization/ Privatization
16
Boom after Liberalization/privatization
17
 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 restructuring
process ( 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.
 SBP’s regulatory and supervisory framework paved the way
for banking of international standards.
 Extensive use of IT attracted both customers & savings.
Continued
PROFITABILITY
During the period from CY 05-09, average profitability has
been Rs. 66 billion/year ( This period also includes the period
of global economic recession.)
18 Source: Quarterly Performance Review of Banking System, SBP, 2009

Continued
SOLVENCY
The banking system of Pakistan has been posting consistent
improvement in risk-based Capital Adequacy Ratio since the
introduction of Basel-II framework.

Continued
BALANCE SHEET ANALYSIS
During five years from 2003-07, banks’ deposits grew
successively at an average of 18.1 % (though during CY08 they
fell to 9.4 % due to economic recession). Assets, Investments,
Advances have also been on rise

21
Boom in Islamic Banking

Boom in Islamic Banking
22
 Since its emergence in 1970s Islamic finance has grown

significantly around the globe.
 There are now more than 300 IFIs operating in around 75
countries.
 Assets of IFIs worldwide have grown to about US$ 700 billion –
with annual growth exceeding 10.0 % during the past decade
and are projected to grow to US$ 1.6 trillion by 2012.
 In Pakistan, since its re-launch in 2002, Islamic banking has
grown progressively showing 59 % per annum increase in asset
base since 2005.
 The branch network of six full-fledged Islamic banks and 13
conventional banks, covering 80 cities, has increased up to 560.
Source: Islamic Finance Outlook 2009, Standard & Poor’s, 2009
Boom in Islamic Banking Continued
PROFITABILITY
IBIs 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 %.
23
Source: Quarterly Performance Review of Banking System, SBP, 2009
SOLVENCY
The 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.
24
BALANCE SHEET ANALYSIS
Pakistani 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.
25
Banks’ Role in the
economic growth of
Pakistan
26
Banks’ Role in economic growth of Pakistan
FINANCIAL STABILITY
The stability of the Pakistan’s financial system finds its roots in
the predominant position of the banking sector, as in
comparison to other components of the financial system, the
banking sector has grown more in relative terms
27
FOREIGN DIRECT INVESTMENT Continued
Profitability in Pakistan’s 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 $228 million.
The May Bank made the biggest investment of US$ 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.
28 Source: Wikipedia, the free encyclopedia.
Continued
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
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 banking
industry.
30
BOOSTING TRADE Continued
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 on
FY2008
31
LOANING TO AGRICULTURE Continued

Agriculture the main source of livelihood for 66% of the
country’s 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.
32
Continued
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

Potential of Banking
Industry to boost economy:
Recommendations
34
Potential of Banking Industry to boost
economy: Recommendations
35
 EXTENDING BASE OF BANKING SERVICES

 Pakistan has the highest number of people per bank branch 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 1,000 people.
 Over half of the population saves, but only 8 % entrust their
money to formal financial institutions.
 One-third of the population borrows, but only 3 % use formal
financial institutions to do so.
Source: Pakistan Microfinance Network, 2008

economy: Recommendations Continued
36
 Most services are concentrated in Karachi and other urban

centers while 2/3 of the population resides in rural areas.
 Surprisingly, an average of 42,000 rural-inhabitants has one
bank branch
 With 24 % of the population (nearly 40 million people) living
below the poverty line, this exclusiveness is critical.
 SBP should link the issuance of license to new braches with
establishment of certain number of branches in rural areas.
 SBP should encourage introduction of innovative delivery
channels ( such as branchless banking) .
 Enhancement of borrower-ship by crossing illiteracy and
cultural and language barriers is also required.
37
 ISLAMIC BANKING
 Shariah-based banking can attract even orthodox sections of
society.
 So far, IBs have no branches in rural areas, where they clearly
have 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.
38
 INVESTMENT IN MICRO-FINANCE SECTOR

 Reach of Microfinance in South Asia
Bangladesh & Sri Lanka (high) 60% of the total poor
India & Nepal (medium) 48% & 20% respectively
Pakistan & Afghanistan (low ) 5 % & 2% respectively
 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 be opened.
 A ‘Question’ for CBs, Why banking only for 6 million rich?
39
 INVESTMENT IN SME SECTOR

 SME sector is the backbone of Pakistan’s 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 7–8 % of the total funding requirements of SMEs
in the country
 SME Bank cannot satisfy to a pool of nearly 3 million potential
SME borrowers. SBP should regulate all CBs to go after a
program-based SME lending in harmony with human
resource capacity helped by IT infrastructure.
Source: IFC’s Report: ‘ Pakistan Microfinance & Financial Sector Diagnostic Study, 2008’
40
 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 the
agriculture credit requirements within 3 to 5 years.
 Lending to the livestock, fisheries, horticulture & dairy sub-
sectors should be made according to the needs of different areas.
 Banking in rural areas should also adopt new innovative
approaches of branching.
 Existing SBP rules call for banks to establish at least 20% of their
new branches in rural areas, but as a matter a fact the number
should be increased to 60%.
41
 INVESTMENT IN HOUSING SECTOR

 Pakistan has an estimated shortage of about 7 million housing
units.
 The CBs' mortgage loan portfolio is concentrated in the major
6-8 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.
42
 PRIVATIZATION OF GOVT-OWNED BANKS.

 HBFCL, Industrial Development Bank of Pakistan (IDBP) and SME
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 and operational
restructuring. This bank is highly strategic, as it provides about
one third (31.7%) of all credit to the agriculture sector.
 SME Bank should be privatized, the HBFC restructured prior to
privatization and the IDBP should be incorporated as a public
company before it is available for sale.
Source: State Bank of Pakistan
43
 RATIONALIZING INTEREST RATES.

 A distortion in interest rates deters savings and also distorts possible
economic developments.
 A minimum deposit rate of 5 % p.a. for all PLS savings product is not the
remedy.
 The PLS system in its present form is unique to Pakistan and excessively
beneficial to the banks.
 The interest-rates’ problem in case of CBs lies with their loans; pleading
them @ 14% & charging @ 30-40%.
 The role of SBP and Banking Mohtasib, in such cases, needs a thorough
revamping.
 World-wide there are efficient mechanisms for consumer-protection
while in Pakistan it is weaker. A financial literacy program to cover both
rural and urban areas can be started.
44
 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 banking
industry, Government should bring new Banking Act.
Conclusion
Conclusion
45
Conclusion
46
 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 Pakistan’s 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.
THANKS
47

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BOOM OF BANKING INDUSTRY IN PAKISTAN

Saeed Ahmed Sheikh

 A growing and dynamic banking sector is essential for

 Banking industry in Pakistan has shown an

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

 This rise in deposits and advances to trillions has tempted

Historical Background of Banking in Pakistan

 FORMATIVE PHASE (1947-1948)

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

 PHASE OF EMERGANCE (1949-1958)

 PHASE OF GROWTH (1959-1970)

 In 1959, United Bank was established.

 Several new banks were added to the list of scheduled

 PHASE OF STRAINS (1971)

 Government started a demonetization operation in

 PHASE OF NATIONALIZATION (1972-1977)

 PHASE OF HEALING REFORMS (1978-1996)

PHASE OF STRUCTURAL REFORMS (1997-2002)

 After 2002, banking system of Pakistan started getting a

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

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

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

Boom in Islamic Banking

 Since its emergence in 1970s Islamic finance has grown

FOREIGN DIRECT INVESTMENT Continued

Profitability in Pakistan’s banking sector, emerging out of the

Pakistan's total liquid foreign exchange reserves stood at

BOOSTING TRADE Continued

The introduction of Part I & II of Export Finance Scheme

LOANING TO AGRICULTURE Continued

INVESTMENT IN INFRASTRUCTURE SECTOR

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

 EXTENDING BASE OF BANKING SERVICES

Source: Pakistan Microfinance Network, 2008

 Most services are concentrated in Karachi and other urban

 INVESTMENT IN MICRO-FINANCE SECTOR

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

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

 Women are a poorly explored section of this tremendous

 INVESTMENT IN SME SECTOR

 INVESTMENT IN HOUSING SECTOR

 PRIVATIZATION OF GOVT-OWNED BANKS.

 RATIONALIZING INTEREST RATES.

 NEW BANKING ACT.

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

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