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BankingReview2014

BANKING REVIEW 2014 | April 20, 2015

ContentsFROM THE EDITORS DESKPAGE 4

BANKING STILL FOUND WANTINGAli Khizar Aslam PAGE 5

BANK-LED MODEL IS THE RIGHTMODEL FOR BRANCHLESS BANKINGNauman DarPresident, Habib Bank LimitedPAGE 6

Syed Majeedullah HusainiPresident and CEO, Askari Bank Limited

NO LEAPS IN PRIVATE LENDING

PAGE 7

RISK DEFINING ASSET MIXZuhair AbbasiPAGE 22

SCB TO HARNESSLIFE CYCLE BANKINGShazad DadaCEO Standard Chartered BankPAGE 24

GOVERNMENT BONDTRADING ON LOCAL BOURSERabia LalaniPAGE 25

FLAT MCR PREVENTINGNICHE BANKING GROWTHHussain LawaiPresident, Summit BankPAGE 26

SBPS ROLE IN TRANSFORMINGMICROFINANCEDr. Saeed AhmedPAGE 28

SBP SHOULD CAP BANKSPIB INVESTMENTSShaukat TarinChairman Silk BankPAGE 30

2014 MARKED NUMEROUSACHIEVEMENTS FOR USJunaid AhmedCEO Dubai Islamic BankPakistan Limited (DIBPL)PAGE 31

DEMAND FOR ISLAMIC PRODUCTS IS MUCH GREATER THAN SUPPLYIrfan SiddiquiFounding President & CEOMeezan BankPAGE 32

BRANCHLESS BANKING SECTIONPAGE 38

DRAFT MORTGAGE RECOVERYLAWS TO BE FINALIZED SOONAshraf WathraGovernor, State Bank Of PakistanPAGE 18

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GOVERNMENT SHOULDBORROW DIRECTLY FROM PUBLICMunir KamalChairman NBP

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GREEN FINANCINGSidra Farrukh

PAGE 8

FINANCIAL INCLUSION:A DREAM NOT SO DISTANTHasan Faraz

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AGRICULTURE FINANCE IN PAKISTAN - MOVING TOWARDS GROWTH AND SUSTAINABILITYDr. Saeed Ahmed

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HOUSE FINANCE AND CORPORATELENDING TO THRIVE IN 2015Mian Muhammad ManshaChairman MCB

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DEBT CAPITAL A PRESSING NEEDAtif BajwaCEO Bank Alfalah Limited

Ali Khizar AslamPAGE 33

LESSONS FROM KASB EPISODE

Tahira RazaPresident & CEO First Women Bank LtdPAGE 34

SMEs ARE OUR MAIN FOCUS

Sohaib JamaliPAGE 36

LAZY BANKERS? REALLY?

PAGE 17

A LOOK BACK TO BANKS IN CY14Rabia Lalani

BANKING IN NUMBERSPAGE 20

BR RESEARCHTHE TEAM

Sohaib JamaliResearch Editor

Ali Khizar AslamHead of Research

Murtaza KhaliqCreative Consultant

Research AnalystSyed Hasan Mehdi

Research AnalystJehangir Ashraf

Rabia LalaniResearch Analyst

Zuhair AbbasiSenior Research AnalystRabia LalaniResearch AnalystZuhair AbbasiSenior Research Analyst

Sijal FawadResearch AnalystMobin NasirEditorial Consultant

Sidra FarrukhResearch Analyst

Naseem Waheed

/ Banking Review 2014 / April 20, 2015

Banking system and economic growth

From Editors desk

The primary task of a bank is to act as an intermedi-ary between savers and borrowers and it is always required to allocate resources at the lowest possible cost in an eicient and judicious manner. A sound and eicient banking system is one of the most important preconditions to achieve economic development. And the objective of this brief note is to call upon our relevant institutions and individuals to examine whether our banking sector is playing a growth-supporting role in the countrys economy because it is generally argued that the more developed a banking system in a nation, the more eicient and healthy will be that nations economic growth. However, before we seek to examine whether or not banks in Pakistan perform their role accordingly, a glance at the landscape of the banking system in the country would be in order. That it has significantly changed in recent years is a fact that has found its best expression in implemen-tation, albeit partially, of financial sector reforms and achievement of a more competitive market structure with expanding market share of private sector banks. The arguments that significant gains have also been achieved in the form of better supervision and regulation of financial markets and institutions, the local banking industry is now considerably resilient in absorbing adverse shocks--both internal and external-- need to be examined carefully. These achievements, however, appear shallow because of a variety of reasons. Internal and external challenges that the banking industry in Pakistan faces are numerous. Internal challenges include lack of technical expertise, infrastructure development, development of liability products, anti-money laundering, human resource development, equity stock investment, E-banking and Islamic banking. Another point that needs attention is the robust performance of big banks in the absence of strong economic growth in the country. The positive relationship between financial development and economic growth seems to have weakened in Pakistan in recent years. It has been plausibly argued that banks or financial intermediaries need to allocate resources eiciently when providing their services and products. Insofar as Pakistan is concerned, banks intermediation is crowding out the use of productive factorsthe real econo-mythat could potentially foster economic growth and development. A seemingly abnormal focus on government papers by banks is a strong case in point. In other words, the government of Pakistan is

perhaps their only or major client. The State Bank of Pakistan, the apex regulator, seems to have ignored for whatever reasons the need for carrying out the required research to examine whether banks relative ability to convert resources into financial products and services aect the extent of economic growth. It needs to oer a convincing argument based on evidence, however empirical, that merely increasing the size of the banking system does not necessarily aect economic growth in a country like Pakistan. It is also required to make it public that the direct eect of increasing private credit is almost negative, indicating that more credit is not necessar-ily allocated in such a way as to spur growth. In the meantime, the apex regulator must not lose sight of the fact that economic growth is one of the ultimate goals of an economic system. It needs to ascertain whether or not the private sector credit and interest margin are negatively related to economic growth. There is a generalized conclusion that a fragile law and order situation and chronic power outages continue to constitute major impediments towards eorts aimed at fostering economic growth and encouraging increased private sector o-take. But these two principal obstacles have been there for the past many years. Consider: Why is it that despite the fact that the country has received GSP-Plus favor from the EU, credit o-take by textile industry, the largest exporter segment and employer of the country, remained largely flat in the last one year? According to the State Bank of Pakistan, outstanding position of loans extended to textile business as of January 31 was Rs 606 billion, which is 0.4 percent less than the corresponding figure recorded at the end of January 2014. The apex regulator is therefore required to inject clarity in the complexity of the present situation. An answer to this question, therefore, has been warranted by the absence of a strong private sector appetite, robust economic growth and new job opportunities in an environment of relatively low interest rates in Pakistan.

Banking still found wantingAli Khizar

The irony is undeniable; an improved macroeconomic landscape has brought some tough days for the countrys banking sector. The inherently cash economy coupled with the government heavy reliance on the banking system has created an anomalous feature among commercial banks in recent times. Last year, the sector thrived on the ineiciencies of the economy; presenting a case study in rent seeking behavior. Since FY08, the economy has witnessed low growth and high inflation. The banking sector was initially hit by high non-per-forming loans which sliced its profitability to almost half (Rs43bn) in 2008 from its earlier peak (Rs84bn) of 2006. This struggle continued till 2010 followed by significant growth in the sectors cumulative bottom line (72%) in 2011 and then remained modest in 2012 and 2013 before it jumped again (46%) in 2014. Prior to 2007, deregulation and privatization of banks bore fruit while the economy grew and private lending thrived. Advances to deposits ratio peaked at 75 percent in 2006. At that time, interest rates were low and economic opportunities were aplenty whilst delinquencies were not a major hindrance for the banks. And with a relatively low fiscal deficit, there wasnt much crowding out of the private sector. The banks were all poised to perform their primary function: financial intermediation. Deposits to GDP averaged at 40 percent for CY05-08 while advances to GDP ratio was 30 percent. These proportions were low compared to regional and global peers but the direction was right. Then came the global financial crisis, and more importantly, the twin deficits crisis at home. Inflation reached high double digits while economic growth was restricted to 2-3 percent. In the midst of these crumbling macroeconomic indicators, banks toxic debts started to swell and profits dropped. In 2010, banks gross non-performing ratio reached 15 percent from 7 percent in 2006. The sector revised its strategy to stay away from the private sector and began looking solely towards government paper to improve asset quality. The objective was achieved; capital adequacy of the sector is much better now as only three banks have CAR below three percent today, compared to seven banks in 2007. No fewer than 22 banks have CAR over 15 percent. SBP needs to revise its criteria for minimum capital requirement of Rs10 billion for small banks, assigning more weight to improved CAR. The causality of skewed approach is KASB yes, the bank had issues but could have been handled in a better way. However, since the risk-free government assets were lowering banks ability to earn through markup, the banks countered by focusing on growing CASA to bring down core cost, even as interest rates rose. That is why with peaked rates, profitability grew in 2011. The banks persist in their obsession with CASA to date. Concurrently, the sectors ADR has come down to 48 percent (2014-end) from a peak of 75 percent in 2008. On the flip side, IDR went up from 26 percent to 58 percent in the same period. Advances to GDP ratio kept on its southward journey, dropping to 17 percent in 2014. To add the ado, banks reliance on cheap deposits (CASA increased from 59% in 2008 to 68% in 2014 ) has swayed marginal savers away from the sector. Deposits to GDP are down to 36 percent (2014) from the peak of 44 percent (2005). Is the central bank doing anything to undo the demise of savings in banking system? On the contrary, it seems the government is facilitating banks by issuing tons of PIBs to replace T-Bills. Consequently, the sectors profitability got a boost in 2014 without doing any real banking. The finance

ministry has literally transferred money to the banks treasuries at the cost of tax payers. The government has issued PIBs of worth Rs2.5 trillion in 2014 alone which is almost double of cumulative issues over the last 13 years. Assuming 2.5 percent average interest rate dierential of PIBs and T-Bills, the incremental annual cost to tax payers is Rs63 billion; out of which Rs22 billion is back with the government through taxes while the rest of the Rs41 billion were pocketed by banks shareholders. That explains the 46 percent or Rs51 billion growth in the sectors profitability during the recently concluded year. Why is the government doing this? Apparently, its an eort to re-profile the maturity of governments domestic debt. But should the re-profiling be so abrupt? Who is responsible for the incremental cost of debt servicing? And why can the government not borrow directly from the public? One way to do so would have been to securitize government debt to home remittances and sell the same to expatriates. But is there any will to follow through on this? Another externality of this debt re-profiling is widening the asset-liability mismatch among banks. The central banks response is, again, in question. Didnt the government bodies think of the cost of banks asset-liability mismatch while mending governments debt profile?

Whatever has transpired cannot be undone, but 2015 holds a dierent reality for the banks; one without super normal profits. Macro indicators have improved; inflation is down, current account deficit is expected to be tamed and other foreign flows will keep the balance of payments contained, for now. There are also some marginal improvements in the fiscal house with a low deficit expected. So the government may desist from issuing large quantum of PIBs and T-Bills. With interest rates trending lower and fewer government paper in the oing, what can banks do to maintain high profits? After all, sustaining high spreads will not be possible. The banks ought to revert to commercial banking i.e. lending to the private sector. But thats not easy; the banks still have the sour taste of high toxic assets from aggressive lending to consumers and SMEs in 2003-2006. Hopefully they have learnt from their mistakes and have come with better models to extend credit to private hands. But even with a measured strategy, rolling out private sector advances will take time and banks profitability growth may be the casualty in 2015.Some banks are geared for vibrant consumer banking with a good product mix of credit cards and personal loans. A relatively virgin area for banks is the mortgage market and if

it picks up, there is immense potential to kick start economic growth. Developed countries have biggest portfolio in the segment (EU: 23% of GDP, US:58% of GDP) while the emerging economies have also thrived on it. In Thailand the share of mortgage lending in GDP is 12 percent while it is mere 0.4 percent in Pakistan. The biggest impediment is the poor repossession law which does not eectively mitigate the risk of willful defaults. That is why banks are cautious in their approach and may target fewer customers in selected housing schemes where property laws are well defined. The other issue is in pricing; the absence of a long term yield curve and lack of long term liabilities to finance loans of longer maturity (20-30 year). The government has lately done some work in developing a mortgage finance company to plug in the holes though the idea first emerged in 2009. The other challenge is to expand SME lending poor documentation and lack of financial reporting are short comings in that space. Meanwhile lenders are living with the memory of losses incurred in the last economic boom. The central credit scoring model did not work so loans have to emanate from branches which must evolve from mere deposit creating shops to profit making outlets. Banks with strong balance sheets can do so. Some banks have models in mind to oer a host of solutions to clients, including full financial management which may eventually lead to capital financing. The regulatory hitch is again, poor recovery laws. SBP must sit with the Planning Commission and other government bodies to create better laws, expedite court proceedings and resurrect banking courts. Until then meaningful SME lending will remain a distant dream. In the corporate segment, the banks will focus on energy sector where a number of projects are coming up. There is some expansion in textile sector which may open avenues for capital lending. There is also an opportunity to increase stakes in the telecom sector as operators are expanding their base to cater 3G/4G segment. Apart from those, building up of roads and other infrastructure must be enticing for banks. The central bank must push forward on financial inclusion. Only 10 percent of the population has unique bank accounts and the thin deposits base (1/3 of GDP) is crying for expansion. Given religious beliefs and preferences, Islamic banking must emerge to fill this void.In a decade of existence, Islamic banking is one tenth of the sector and still has a lot of room to grow. Virtually, every bank has aggressive plans to expand its Islamic portfolio and one bank (Summit) is set to convert into an Islamic bank. Others plan on beefing up their Islamic banking operations through subsidiaries and windows. It would not be surprising if Islamic banking share doubles in the next five years. One hopes banking coverage will increase as a consequence. SBP had earlier instructed banks to open a branch in a remote area for every five new branches. Sooner or later, the deprived rural community will have some access to banks. But alternate delivery channels are also driving financial inclusion and although challenges remain, the successes of UBL Omini and Easy Paisa are for others to follow.

Page 05 / Banking Review 2014 / April 20, 2015

Macro indicators have improved; inflation is down, current account deficit is expected to be tamed and other foreign flows will keep the balance of payments contained, for now.

The writer is Head of research at Business Recorder. He can be reached at [email protected]

Bank-led model is the rightmodel for branchless banking

BR Research: What concerns the most to the countrys largest financial institution?Nauman Dar: Financial inclusion! Lets establish the context for it. As the countrys largest financial institution, we have 15 percent market share but we have only eight million customers. As you know, the country has a population of more than 180 million. Clearly, there is something wrong in terms of financial inclusion. We believe that financial inclusion is extremely important for the development of the country. Gender diversity is extremely important for the development of the country. Making financial transactions easy to execute for individuals is extremely important for the country.

BRR: So, how do you increase the inclusion as a responsible, large bank?ND: You must have your footprint, access, increased outreach and you must have people in place who understand why they are doing what they are doing instead of being focused solely on making money. If you analyse it such, it becomes obvious that achieving these objectives in this day and age, you must harness technology. The people who work for you and the technology you deploy are vital components of strategy. With these thoughts, you must have an approach of having desire and ability to invest in people and technology and have the belief that the results will follow. We have a board that believes in that. Our majority stakeholder firmly believes in that so we are not chased every quarter about how much money we made. We are asked how many more people have you touched and what have you enabled them to do? Unlike many other banks, we have never closed a branch purely on profitability grounds. We believe that financial inclusion is very much a fabric of our thought process. We believe that is the business. Chasing numbers and profitability drives banks to make bad decisions and costly mistakes.

BRR: You mentioned technology; how much have you been investing in technology?ND: Heavily! We have gone into branchless banking and are investing in that. We have gone into making mobile phones more eective way of dealing with the bank. We are investing in phone banking. In 2011 our tech

spend was a billion rupees. This year it was Rs2.7 billion. Thats over 30 percent growth per year in that period. If you look at the year of privatization, the tech spend was Rs282 million. The very next year it went up to almost Rs800 million and almost a billion in the following year. That initial surge was due to the implemen-tation of our core banking ERP. Following that there was a consolidation period until 2011-end. We have now gone into eiciency upgrades and new systems for delivery channels.

BRR: You add enough branches each year to constitute a mid-sized bank. Yet there are many underserved urban areas and unserved rural areas. What is HBL doing to address that void?ND: We feel that for someone like us can make a significant dierence by placing ourselves in the digital space. Our savings deposit category makes up about 44 percent of our total deposits. Thats a big chunk. Thats our strength. This proportion has remained a very big proportion despite the fact that total deposits have doubled since 2010.

People feel comfortable in keeping their money with us. When it is a telco or a new bank that lets you load money and get it to the other end very fast, people will use the service for money transfers but not be comfortable with leaving that money in a mobile wallet. We feel that if HBL has its footprint in digital space in a meaningful way, we will inspire the confidence that will let people store their funds thus. This bank-led model is the right model because it can increase savings but it will only happen when the banks are in that space. Unfortunately, the banks were denied that access by the telcos. The secure USSG

channels were not given to the banks by telcos. So the banks had to work around it and build on SMS, etc that made the process cumbersome. With changes in technology and prevalence of smart phones, the banks will have their mobile apps and telco performing the interplay will become less relevant. So it is only a matter of time until banks like HBL will find their proper space in that segment. Then you will see an increase in the number of people putting their money in banks.

BRR: Deposits may grow in this way but banks are not lending to private sector either. As rates go down, wont the banks find it hard to expand advances?ND: Where we are focusing and see the future is: firstly, agriculture. We are an agricultural economy yet if you look at farmers, there is hardly any access available for financing. Banks do not have programs which take them to the rural areas. We as HBL have been most active in rural, agricul-tural financing among the private banks. The growth that we have exhibited in this space is 17-18 percent per annum for the past couple of years. Its still small, having gone

from Rs14-15 billion to Rs24 billion. In a country of 180 million people, which is 70 percent agri-based, why shouldnt this tally be Rs40 or Rs80 billion? All you need to do is have good underwriting standards and a strong field presence that understands the local dynamics which dictate the perfor-mance of loans. Five years ago this was a lot harder. But when you understand the environment, deploy people and technology, performance improves significantly. Similarly in the case of consumer lending, the growth is over 20 percent. If we can build on this, we can break into those segments. We are focusing on

SMEs. Where the credit o-take has been slow is in the medium and large industries due to energy shortages but also because businesses have retained earnings and limited their borrowing requirements. Banks have also learnt from their experiences with non-performing assets.

BRR: In early 2000s, banks were lending heavily. We are now entering similar market conditions now. How do you see the banking sector responding to the situation this time around?ND: There is no reason for the banks repeating the horrendous experiences of the past if they are prudent and professional. Consumer financing in Pakistan is among the lowest in the world. So there is also a lot of room for growth. Coming back to HBL, we have stressed with our teams that they have to be extremely careful and sensitive to mis-selling. You can very easily falter if your mind-set is focused on driving numbers. We have been extremely successful in providing investment products like bancassurance to all strata in the economy. To do so, you have to ensure that the person buying the product understands the product. We have to ensure that the person has a genuine need for that product and it makes a tangible dierence to their living standard.

BRR: Smaller banks have issues with blanket MCR requirements for all banks. Do these measures drive all banks away from niche banking and towards safe havens?ND: My view is that banking aects the stability of the overall economy and banks must be very well capitalized because economies like ours are fragile to start with and cannot aord financial crises. Banks must be very well regulated, well capitalized and have lots of liquidity. In my opinion, there are too many banks in Pakistan. There should be some consolidation so if some of the small and medium banks were to merge, they would emerge as much stronger institutions.

Interview by Ali Khizar & Mobin Nasir

Mr. Nauman K. Dar was appointed President and Chief Executive Oicer of Habib Bank Limited in September 2012. Mr. Dar joined the Bank in March 2003 as Chief Executive Oicer of Habib Allied International Bank plc, UK. Prior to being appointed as President he was Head of International Banking since January 2006 and Head of Corporate and Investment Banking since December 2010.

Nauman DarPresident, Habib Bank Limited

Banking aects the stability of the over-all economy and banks must be very well capitalized because economies like ours are fragile to start with and cannot aord financial crises


No leaps in private lending

Commercial banks are not engaged in lazy banking, they are merely being prudent and conservative with the depositors money, said Syed Husaini, President of Askari Bank in a recent sit down with BR Research. Asked whether the falling rate of return on govern-ment securities may finally force banks to rely on private sector lending, he retorted that, there will be no leaps in private lending, even as spreads thin and the rate of return on government securities shrinks. Elaborating on his assertion, Husaini said that the hurdles for domestic businesses are exogenous factors including energy shortage, fragile state of law and order, political noise and militancy. He maintained that until these challenges are overcome, lending to businesses would remain fraught with risk, even where the business owners are well intentioned and strategically aligned.Bad loans in Pakistan stand over Rs700 billion to date. Banks are entrusted with money by their depositors and investors and they have to be conservative and risk averse to ensure wealth preservation before they can get aggressive in chasing higher returns, he said adding that given the level of bad loans, lacunas in foreclosure laws and overall economic conditions, banks are not at liberty to lend freely in private sector. In his opinion, competition for funds is the best bet for driving banks towards private sector lending; the real issue to consider is the low cost of funds. As long as the cost of funds remains low, banks will remain incentivized to park major proportions of their balance sheet in government securities.One area where Askari Bank is lending heavily is infrastructure. We believe this is currently the most important sector of the economy, said the bank president highlight-ing AKBLs involvement in Lahore-Karachi Motorway, Rawalpindi Metro Bus, Nandipur Power and other projects. We have also financed aircraft and spare parts for the

national airline, he added, expressing readiness to engage in any further opportuni-ties to lend in infrastructure development projects. If all the banks get together to focus on infrastructure development projects, we can really help drive broad-based economic growth, he contended. The former central banker has been at the helm of aairs at Askari Bank since the Fauji consortium acquired it in June 2013. At the time of acquisition, the banks books appeared unenviable. The proportion of non-performing loans was high, and the profit and loss statement was written in red. The new management aggressively provisioned for bad loans, opting to book a loss of about Rs3 billion in CY13. The strength of Fauji consortium allowed us to book this loss, bring in fresh

equity raising Rs5 billion through a rights issue. These measures helped us strengthen the balance sheet and set a solid base for sound performance in CY14, said Husaini. Before trying to go anything good or great, you must first stop the wrong practices, he said adding that the banks senior manage-ment focused on strengthening controls, improving transparency and standardizing operations. The bank president remains humble about accomplishments citing favourable equity markets and stability on fixed returns and exchange rates as key contributors to the banks ability to improve its profitability by an order of magnitude. The outgoing year has been a good one for

Askari Bank and its stakeholders, thanks to strong bottomline gains in the calendar year. The new management has also regularized a majority of the contractual sta, giving the employees a reason to smile too.Now that the house is in order, AKBL is primed for expansion in 2015. We are aiming for organic growth of 100 branches in addition to the 320 existing branches as at end-CY14, informed Syed Husaini. Askari Bank has bid to acquire KASB Bank as well; and could therefore gain another century of branches if that deal goes its way. Among other opportunities that AKBL is targeting in CY15, the bank looking to expand overseas through representative oices and branches and continue to focus on mobile commerce and branchless banking.

According to Husaini, international conditions are favourable for Pakistan to get its fiscal house in order. Commodity prices are low, yet demand for Pakistani exports is firm, external accounts are intact and investment flows are steady. He opined that further investments should be sought from China, GCC and other regional countries to drive large-scale projects. He expressed hope that the government will use this window of opportunity to initiate pro-growth policies and economic stability.

A CASE STUDY ON CSRProud parents looked on as their children were inducted as bank oicers in Askari Bank

at a simple yet graceful ceremony. The new recruits were all children of the banks low-cadre employees and had been hired following the completion of their graduate level education and an entrance test. When the new management stepped in, we immediately tried to regularize as many contractual employees as possible. But the low cadre team members could not be included in this exercise given lack of educational credentials, explained the banks president. But in life it is often our children who accomplish those dreams that the parents are unable to turn into reality. With that thought in mind, the bank initiated a program whereby children of low-cadre bank employees can appear for a standardized test following graduation from university. Upon clearing the test they are provided paid training and guaranteed employment. In addition to this, the success-ful candidates receive complementary oice attire: two shalwar suits for female employ-ees, two pairs of pants and shirts along with a pair of ties for the male employees. This and other initiatives have brought a marked improvement to team morale and work ethic, said the president. We are certain that improving the level of satisfaction and happiness among the people who comprise this bank is what will lead Askari Bank towards sustained success, he concluded.

Interview by Mobin Nasir & Zuhair Abbasi

Syed M. Husaini joined the Bank as President & Chief Executive on June 03, 2013.Mr. Husaini is Masters in Economics from Karachi University and has obtained professional certifications by the National Association of Securities Dealers, USA and North American Securi-ties Administrators Association.He brings experience of over 30 years in Banking, of which the first ten years were spent overseas with a number of International Banks in Kenya, Sierra Leone, South Africa and the Middle East. His assignments led him to successfully manage diversified areas of banking business including foreign trade finance, Commercial and Corporate finance and Liability management. He played a significant role in developing training programs and has remained faculty member with a number of Financial Institutions.

Syed Majeedullah HusainiPresident and CEO Askari Bank Limited

Banks are entrusted with money by their depositors and investors and they have to be conservative and risk averse to ensure wealth preservation before they can get aggressive in chasing higher returns



A growing number of banks are trying to replicate the success of the mobile money networks like Easy Paisa and Mobicash


According to a report by the Alliance for Financial Inclusion (AFI), nearly 85 percent of adults in developing countries like Pakistan do not have access to financial services (afi-global.org). What this means for a developing nation like Pakistan is simple; if we know what are the eects of financial exclusion in context. Financial exclusion results in widespread inequality in incomes and earning opportunities, Lack of opportunities to improve businesses both export and local, unregulated private money lenders who exploit borrowers, no access to consumer finance and inappropriate cash flows among several others. Pakistan being an economy of 180 million needs a compulsory set of services in the bank to draw in the poor. Banking products should address their needs: a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the money lender, easy to understand life and health insurance and an avenue to engage in savings for the old age. However, there are a number of challenges that must be overcome. In order to establish their branchless networks, banks have to tie up with kirana shops, corporate firms and others. Although several banks in the country are in the branchless business now, but the results are yet to blossom. Since mobile banking through phones is to play an increasingly important role in a scenario where physical bank branches will be few; greater coordination between cellular service providers and banks will also be necessary. Unfortunately, the banks and and cellular service operators are currently engaged in a power struggle over the unbanked. A growing number of banks are trying to replicate the success of the mobile money networks like Easy Paisa and Mobicash. Support from the government and central bank has been forthcoming and will remain crucial going forward. Then the culture of tax avoidance is rampant and needs to be undone. On the other hand, insistence on KYC (know your customer) norms has hindered the opening of new accounts even in urban areas. Great significance is, therefore, attached to simplifying the KYC process. Creating provisions for opening bank accounts without proof of income and minimized KYC criteria may be helpful in this regard. This is a fine line for regulators as they attempt to simplify access to banking while at the same time, keep tabs on unscrupulous economic activity. Obviously, commercial viability is the key to success. Past experience suggests that without proper products, the facilities on oer will not be used by the target market while the banks will be saddled with a large number of dormant accounts. Microfinance penetration has grown at an impressive pace but its services must evolve and enhance further to boost financial inclusion. The perception of conventional banking system is misconstrued, particularly in rural areas and here too, all stakeholders will have to play an active role. Rising financial literacy can play a comple-mentary role to financial inclusion; and eorts are needed to highlight the importance of savings to the general public. It is equally important for the banks and financial institutions to become more relevant for prospective clients. Their services have to be designed to meet the most pressing needs of the people, using their preferred technology for interaction. There are opportunities for smart interven-tions, for instance targeting womens savings and providing services such as ease of access, privacy and security. The Islamic banks, working as trading or investment houses can oer lower risk to clients and also enjoy strong repute among general public. For this reason, the Islamic banks are well poised to lead financial inclusion in the country.

FinancialInclusion:A dream not so distant

Hasan Faraz is Vice President - Retail Product Development at Meezan Bank Limited. Hasan Faraz holds a MBA degree from IBA Karachi, and carries experience of over 8 years in Financial product development and technology banking.

Hasan Faraz

INTERVIEW BY: MOBIN NASIR AND SOBIA SALEEM

Government should borrow directly from public

14 36

Munir Kamal | Chairman NBP

The governments over reliance on the banking sector for meeting its borrowing needs is an oft repeated tale. Improving foreign inflows and renewed strength in external balances may satiate that appetite to a certain degree in coming months. But the government has not made any tangible eorts to diversify its domestic borrowing from the well beaten road of PIB auctions. Many of the banks have made a lucrative, although unimaginative business of taking deposits from the public and piling up risk-free government paper. Unlike many of the other big banks, National Bank of Pakistan has more loans on its balance sheet than PIBs

and treasury bills. The bank has dealt with the menace of non-performing loans, having had to make signifi-cantly higher provisions in 2013 than the industry; but in 2014 NBPs books look sharp as a tack. We have picked up PIBs this year but NBP has always been in the market and thats why we are comfortable going into a period of lower rates and thinner spreads, Chairman NBP Munir Kamal told BR Research. As the conversation began, Kamal made his disdain for lazy banking apparent at the outset: banks cannot simply give up on their basic purpose of financial intermedia-tion just because there is an emergent supply of government paper. Echoing the concerns raised by many other industry veterans and policymakers, he highlighted the dismal trend of bank lending to small and medium enterprises. Less than seven percent lending is going to SMEs; thats a shame. According to Kamal, banks must learn lessons from previous less than successful bouts with private sector lending but remain hungry to lend to private sector particularly to SMEs. Referring to the Prime Minister Youth Loan Scheme that is being conducted through NBP, he said, bringing these disenfranchised segments into the banking sector is a challenge we are taking on and the industry as a whole must also. Given the decline in general price levels and the central banks accommodative stance, the writing is on the wall for interest rates. So will the banks be able to beef up private lending as banking spreads shrink? Falling oil prices have brought a respite to inflation. The government has lost some revenue also, but it can

put the fiscal house in order with the help of transac-tions like disinvestment from HBL, he said, adding that a relatively satiated government appetite for domestic borrowing coupled with expected improvements in economic growth will drive banks towards private sector lending. It is simply better margins, he said, asserting thinning spreads will complete the potion that will make banks fancy consumer lending again. The banking veteran is sure that some banks will emerge as clear winners in coming months. The ones that have a vibrant consumer banking product mix and have worked diligently on credit cards and personal

loans, like Bank Alfalah and United Bank, will benefit immensely as the economy picks up. But the buck does not stop at auto finance and credit cards. All vibrant economies have prevalence of mortgage finance besides auto loans and credit cards. It is not possible for an economy to prosper without all three. We need to develop the mortgage finance segment collectively as an industry, said Kamal pointing out the need for eorts from the regulator, banks and other stakeholders. Naturally the conversation drifted back towards the role of the government. Government should borrow directly from public instead of going through banks, Kamal said in a matter-of-fact tone. He explained that the depth in secondary debt market and competition in attracting deposits will be among the positive externalities of diversified domestic borrowing sources for the government. Lack of clean property titles and unfavorable repossession laws are commonly cited impediments to growth of mortgage financing. Very little progress has been made on both fronts since the early 2000s, but Kamal expressed confidence that will change soon because the banks will be forced to lobby for all those changes that can lead to a more conducive lending environment. They will do it now, because now it will become a matter of survival for the banks, he concluded.

All vibrant economies have prevalence of mortgage finance

besides auto loans and credit cards. It is not possible for an

economy to prosper without all three. We need to develop the

mortgage finance segment collectively as an industry,

Interview by Mobin Nasir & Zuhair Abbasi


Sidra Farrukh

Green financing

The writer is a Research Analyst at Business Recorder. She can be reached at [email protected]

Certainly the drumbeat of energy crisis has crippled the economy of the country, and one area in the banking sector that has immense potential is green financing. Globally as well, soaring energy needs, volatile oil prices and deteriorating environ-mental aspects have spurred green investments. Green finance is a broad term that can denote to any financial investment for environmental sustainability. Particularly for the banking sector, PricewaterhouseCoopers Consultants define it as financial products and services, under the consideration of environmental factors through-out the lending decision making, ex-post monitoring and risk management processes, provided to promote environmentally responsible investments and stimulate low-carbon technologies, projects, industries and businesses. While green financing is a relatively new term for Pakistan, the banking sector has started taking baby steps into this segment; a significant numbers of commer-cial banks including National Bank of Pakistan, Bank Alfalah Limited, Allied Bank and MCB are moving towards energy eicient operations where most of these commer-cial banks have opted to run their ATMs on solar power. Most of them are also coming up with dierent solar power products. These involve solar projects at micro level like roof top installations for households, 500W-5KW customisable home solutions, and loans for tube well conversion to solar power in agri sector. Here, the role of microfinance banks in the country is worth mentioning as they actually opened up space in green financing for the big banks. Microfinance players like Tameer Microfinance Bank and Khushhali Bank have joined hands with technology providers to oer an array of solar home solution based on unique models like Pay-as-you-go (PAYG) and Plug-and-Play. The microfinance institutions are providing solution between 30 -100W for bottom of the pyramid market that is o the national grid. The focus seems to have set with funding solar energy solution as of now perhaps due of its vast potential; Pakistan falls in one of the richest solar belts. A US study shows that the total potential of the country to create power from solar energy is around 18000MW. The country enjoys better solar radiance compared to the world leaders in solar power like Germany and other Scandinavian countries. So what is the viability of such financing products? Lending in such a segment comes with a pinch of salt. According to industry players and experts alike, the key factor for it is the technical plan and the quality of service and the biggest caveat for banks oering solar solutions at micro level is the existence of many private providers in for a quick buck. Though these players are not oering funding facilities, they pollute the industry, spreading mistrust as they lack technical feasibility and planning. Also, structuring green financing can be complex; because it is eccentric and still uncommon, it requires more legal creativity than the conventional financing.

While there are specific set of rules and requirements for the traditional lending, financing for alternate energy, and that too at micro level, is in its nascent stage in the banking sector. Also borrower awareness is still low to attract them to these solar arrays. On the other hand, the returns are quick on solar energy solutions; even if technology, which is dynamic, is kept constant, the payback is around 4-7 years along with economies of scales. The regulatory requirements also play critical role when it comes to bank lending. Though the renewable energy policy talks little about allowing households to produce solar energy and put excess production on national grid, governments recent initiatives are encouraging. State Bank of Pakistan (SBP) has recently amended its housing finance prudential regulations to allow banks to oer loans to individuals for solar energy solutions for residential use at aordable finance as part of home loans. Previously, these loans were extended by the financial institutions as personal loans for a maximum period of five years. After the recent amendment by SBP, the tenure for solar energy solution funding stands at maximum ten years, making products with 4-7 year payback viable. These eorts will not only provide a platform for green financing to flourish, but also have positive impact on mortgage finance. Alternate Energy Development Board (AEDB) is also in working to promote clean energy financing; it is looking forward to a new study about the countrys renewable potential to be completed which correlates the existing satellite data with new ground stations to generate bankable data. So, the grass is certainly greener on the green financing side. The financial institutions need to put their best foot forward in making their contribution towards the energy sector muddle.


House finance and corporate lending to thrive in 2015

BR Research: How did you find 2014 for the banking sector?Mian Muhammad Mansha: It was a very good year for the bigger banks, and this has been putting pressure on the smaller banks. There are issues in the smaller banks, and State Bank of Pakistan should encourage bigger banks to takeover smaller banks. This is a world-wide practice; the number of banks in UK and US has reduced after a very active M&A activity in their banking sector. The option for smaller banks to exist on standalone basis is to focus on a particular niche. While 2014 was celebrated by bigger banks, I believe that the results will start tapering o in 2015 as we face falling returns on PIBs in a low interest rate environment. Banks will have to reduce their intermedia-tion costs aggressively. For this we are trying to expand and bring more people into banking to increase our deposit base. Also, the banks need to control other expenses like energy and other overheads. It is unfortunate that the deposit-to-GDP ratio in the country has actually gone down from 35 percent in 2003 to 32 percent today, whereas it is almost double in India. And with no vivid growth in the economy, the lending-to-GDP ratio stands at 16 percent, while it was above 20 percent somewhere in 2003. I would reiterate that we need to bring more people in banking.

BRR: What is MCBs loan book like in comparison to that of other banks? MMM: We stand at a much better position in 2014. We cleaned up certain things; we came out with better schemes in problem areas of consumer lending like housing loans and car loans. The model that we are now running is reducing the interest cost on the loan according to the equity the borrower brings in. Somebody who brings in more equity will be charged as one of our better clients. Similarly, after the revamping of costs, our borrowing on credit cards is also increasing.

Car loans have also increased partly because of the market, and partly because of our eorts to make them attractive for the borrowers. Today, we are at the highest level of what we have ever lent. And we need to continue lending money to people who create jobs.

BRR: Why do you have to worry about lending when you can put money in government securities? MMM: The argument that the banks do not need to lend as they can park most of their funds in government securities is flawed. And so is the idea that banks lend to only a specific super-rich clan. The government gives us the interest rate, but it is actually the yield that we are after. Yield only comes in when we get over and above the interest rate from our lending. It is a misconception that banks dont want to lend.

BRR: With the interest rates coming down, which sector are you eyeing in 2015?MMM: One such sector is housing finance where a lot of overseas Pakistanis are also involved. We would like to focus more on this sector by giving competitive rates. Another need of the hour is the energy sector; there are many small energy projects that we will look into. We are also trying to improve the capacity of the existing customers. Also with the government raising funds from privatization proceeds, and with CSF also coming in, banks will have to explore options other than lending to the govern-ment. Here, I see additional corporate lending by the banking sector in 2015 as most of the energy projects are quite capital-intensive. We are also looking at expanding globally. The potential in Iran is huge, and once sanctions are removed, we are planning to look into opening a bank there. We are also in touch with the Afghan oicials for a bank in Afghanistan, and we are also applying for a bank in India.

BRR: How big a hindrance is foreclosure requirements in house finance in Pakistan? MMM: Its a significant hurdle in Pakistan as there are many legal issues and default cases here. MCB has the lowest NPLs because this is where we are good at: we consider ourselves as good relationship managers as we carve clients based on their history and our thorough judgment.

BRR: Can banks attain the 4.5 percent gross spread as proposed by the SBP?MMM: I think the banks should try to come close to it. I personally think that the bigger banks would be able to achieve it as our other income is quite a lot, but it will be a challenge for some of the weak smaller banks that have balance sheet related issues. I suggest that these banks should be merged either with bigger banks or with other smaller banks.

BRR: What should the banking sector focus more on: Capital Adequacy Ratio, or Minimum Capital requirement?MMM: In Europe if you have a Capital Adequacy Ratio of seven percent you are considered good; we have 25 percent. In that context, our top five banks are very healthy banks. So, I reckon that the banking sector should focus both on the Minimum Capital Requirement and the Capital Adequacy Ratio. BRR: Where do you see growth rate and interest rates going from here?MMM: With IMF on our backs, we want to create more deposits in the industry and maintain exchange rates. I see interest rates going down but not drastically low if we want to increase the saving rate, incentivize deposit growth and contain currency fluctuations. As far as growth is concerned, all depends on the ongoing war on terror. Once we succeed, which we have to as we do not have any other option, I see a spell of growth in various industries like infrastructure, energy, electricity etc.

Interview by Ali Khizar & Sidra Farrukh

Mian Muhammad Mansha | Chairman, MCB

BR Research caught up with Mian Mansha at his residence one afternoon last month. What followed was a discussion on MCBs plans for regional expansion, thinning banking spread, the need for mergers and acquisitions in the industry, and the business sectors that he is eyeing. Below are edited transcripts.


Agriculture Finance in Pakistan-Moving towards growthand sustainabilityDr. Saeed Ahmed

Majority of the worlds poor, an astounding number of over two billion people share one common profession: farming. But where agriculture harbors so many of the worlds poor; it also oers the key to graduate economies out of the vicious cycle of poverty and food insecurity. Beyond direct links to rural livelihood, agricultural sector has strong links to the rest of the economy, and this is one of the most powerful ways in which it generates overall growth and reduces poverty. Empirical evidence suggests that investment in agriculture is 2.5 to 3.0 times more eective in increasing the income of the poor than is non-agricultural investment. Based on this premise and the strong linkage between agriculture finance and economic growth as documented through a host of research and global experiences, State Bank of Pakistan (SBP) has continued to make relentless eorts to promote agriculture finance. A rear-view of this long rocky uphill journey on the road to agriculture finance development shows that State Bank and the banking industry together have achieved some proud milestones to nurture the transition of Pakistan into a more diversified and faster growing economy. The seed of change was sowed with State Banks decision in 2005 to move away from its mandatory credit regime where force-feeding of targets to heavily regulated

banks was the norm with little, if any, consideration given to market forces and business prospects; towards a more open and market led model where State Bank adapted itself to the role of a facilitator and developmental partner of financial institutions to fecundate the growth of agriculture finance in its natural eco-system. Since then SBP has worked persistent-ly to foster an environment which is conducive for the development of agri-finance.

While setting aggressive indicative credit targets in consulta-tion with banks, SBP has simultaneously ensured that the right tools and policy framework are also made available for the banks to make a strong business proposition in serving their rural clientele. Its interventions not just involve address-ing regulatory barriers but also developing market informa-

tion & infrastructure to address industry bottlenecks and market failures. It has continuously been working to enhance capacity of banks in modern agri-financing and to reduce demand-side barriers such as low financial literacy. The results of these interventions have been impressive! Agri-fi-nancing disbursement which stood at a modest Rs212 billion in FY07-08, has seen splendid growth to reach a remarkable figure of Rs391 billion in the outgoing year of 2013-14 with Agriculture Credit Advisory Committee (ACAC) pushing the limits to an even more exigent credit disbursement target of Rs500 billion to be achieved during FY14-15. While a Rs109 billion (28%) jump in credit target over the previous years actual disbursement of Rs391 billion may seem ambitious, the progress so far appears to be promising and speaks volumes for the strong dedication and commitment that the industry players have collectively shown to the cause of promoting agriculture finance. Disbursements for the first eight months of FY14-15 have been Rs289 billion which constitutes 58 percent of the total target of Rs500 billion is 32 percent higher compared to Rs218 billion disbursed in the corresponding period, last year. Numbers speak for this favorable trend indicating a gradual closeout in agri-financing gap between credit demand and supply which has been brought down from 63.5 percent in


FY10 to 47 percent in FY14, and continues to shrink further with the exponential growth in targets and their achievement.The growth in agri-credit supply has gained momentum in recent years to surpass the growth in agri-GDP. With each passing year, new boundaries are being defined to deepen the roots of agri-credit and encompass an increasing number of farming households into the formal financial ambit. Amid an environment where private sector credit is dwindling and crowding out is being chanted as headline news, this favorable trend is corroboration of the fact that the grass is turning greener against all odds. To augment this stellar performance, banks have also managed to increase the outstanding portfolio by Rs34 billion to Rs308 billion along with curtailing the non-performing loans to 11.4 percent of the total portfolio as against a previous figure of 13.8 percent. Alongside these achieve-ments, the agri-financing landscape has also changed for good. Where the overall pie has grown in size, a shift in market share has also been witnessed away from the traditional approach of specialized and government led financial institutions being the only significant players in agri-lending to a more market led model wherein private sector banks are increasingly exploring opportunities in what was previously an unchartered territory.

At present, the number of participating financial institutions has risen to 33 financial institutions (as opposed to only 20 institutions in 2010) which not only include the top-tier commercial banks and specialized institutions but the horizon has been widened to include microfinance and Islamic banks into the agri-financing ambit too. For instance, while the agri target of ZTBL in absolute terms has grown, its market share has shrunk from 31.6 percent in 2007-08 to 18 percent in 2014-15, indicating healthy market competition. To achieve its mission of providing an enabling environ-ment for the growth of agriculture finance, SBP has taken a holistic approach which goes beyond the old-school approach of policy framework and regulatory purview to thoroughly cover aspects of risk, technology, innovation and capacity building. SBP has taken initiatives to promote agri-financing to bring depth, inclusion, eiciency and stability into the system. As an illustration to its approach, State Bank has aided in mitigating significant risk of crop financing through its Crop Loan Insurance Scheme (CLIS) with significant funding support by the Federal Government for subsistence farmers. The eectiveness of this can be witnessed in the 2010-11 floods wherein claims of over Rs1.4 billion were paid to farmers which significantly reduced the infection potential of banks agriculture portfolio besides giving relief to the farmers. CLIS has played a pivotal role the in robust growth of agri-credit disbursements. Besides benefiting large borrowers of aected areas it has also strengthened the trust of banks in financing to farmers exposed to the vagaries of nature and that too at the time of fast emerging global climate change. Livestock contributes half of the agriculture GDP, however largely remained unattended by formal financing. To address the inherent risk of livestock financing, Livestock Loan Insurance Scheme has also been introduced through

which, it is hoped that financing will be channelized to this important area too, which is crucial to the overall growth and wellbeing of the agriculture segment. To stimulate demand for formal credit, SBP has been closely involved in capacity building initiatives. Through its Farmers Financial Literacy Programs, SBP has targeted thousands of farmers in all provinces and AJK to educate them about managing personal finances and proper loan utilization which are essential life skills for combating poverty. Over 90,000 farmers have been touched in over 2000 grass root level programs conducted by SBP trained field sta since 2012. SBP has been a proponent of innovation and technology and has shown its strong commitment and support for all initiatives that can add value to its mission of developing agri-finance as a viable business line. Through donor funded initiatives such as Financial Innovation Challenge Fund (FICF) under the DFID-funded Financial Inclusion Program, SBP has worked on and supported numerous innovations which continue to transfer benefit to an increasing number of rural

households. One such intervention is the promotion of Information and Communication Technology (ICT) which oers the prospects of enhancing the delivery of a wide array of financial products to reach a greater number of agricultural clients. Also, SBP is supporting establishment of warehouse receipt financing system in the country to address the issues of post-harvest losses and collateral management against commodities to benefit small farmers. On the policy front, SBP has revised Prudential Regula-tions for Agri-financing to remove regulatory impediments and bring fluidity to the flow of credit to the farming commu-nity. Under the revised PR, banks are required to develop an agri-finance strategy and include agri-credit in the key performance indicators of the respective oicials. SBP has also issued guidelines on various subjects such as Value Chain Contract Farmer Financing, Horticulture, Fisheries and Poultry Financing and Islamic Financing; to stimulate banks into exploring business potential in each of these areas. Through constant support and feedback, the central bank is helping banks in developing products and the required expertise to venture into these fields that have so much to oer in terms of profitability, economic growth as well as other social benefits.

Over arching these initiatives is SBPs target allocation and monitoring function wherein SBP works closely with banks to ensure challenging targets are set and utmost eorts are made to achieve them. It is through constant monitoring and feedback that progress is ensured and any deviations are addressed in a timely manner. Other than quarterly meetings with regional management to review performance and address issues, SBP plays a facilitation role to provide maximum support to banks so that they dont fall short of their targets. The result of this constant push can be seen in a steep upward trend of agri-credit targets where disburse-ments are continually surpassing targets. The growth in agri-credit has continued to outpace the growth in agricultur-al value-added in GDP and is fast catching up to bridge the gap between credit demand and supply. Disbursements for the first half of FY14-15 have been Rs219.5 billion which constitutes 44 percent of the total target of Rs500 billion is 38 percent higher compared to Rs159.4 billion disbursed in the corresponding period last year.

They say the journey of a thousand miles starts with a single step. The single step taken towards incubating agriculture finance has started to bear fruit. Change has come in the form of a move from mandatory to market-based regime, from cooperatives to commercial banks, from sharing of bonafide losses to credit guarantee schemes and banks willingly financing agriculture. Going forward, the most critical challenges are inclusion of majority small and marginalized farmers, addressing geographical imbalances and financing to non-crop activities, which will lead to enhancing the share of agri-credit in banks advances. SBP is committed to continue its eorts to deliver real benefits to the farming community and it is hoped that with the joint eorts of policy makers and the industry, agri-financing would soon emerge as a sound, scalable, and sustainable business segment for banks in Pakistan.

Gap (as % of demand)SupplyDemandYear

Majority of the worlds poor, an astounding number of over two billion people share one common profession: farming. But where agriculture harbors so many of the worlds poor; it also oers the key to graduate economies out of the vicious cycle of poverty and food insecurity. Beyond direct links to rural livelihood, agricultural sector has strong links to the rest of the economy, and this is one of the most powerful ways in which it generates overall growth and reduces poverty. Empirical evidence suggests that investment in agriculture is 2.5 to 3.0 times more eective in increasing the income of the poor than is non-agricultural investment. Based on this premise and the strong linkage between agriculture finance and economic growth as documented through a host of research and global experiences, State Bank of Pakistan (SBP) has continued to make relentless eorts to promote agriculture finance. A rear-view of this long rocky uphill journey on the road to agriculture finance development shows that State Bank and the banking industry together have achieved some proud milestones to nurture the transition of Pakistan into a more diversified and faster growing economy. The seed of change was sowed with State Banks decision in 2005 to move away from its mandatory credit regime where force-feeding of targets to heavily regulated

banks was the norm with little, if any, consideration given to market forces and business prospects; towards a more open and market led model where State Bank adapted itself to the role of a facilitator and developmental partner of financial institutions to fecundate the growth of agriculture finance in its natural eco-system. Since then SBP has worked persistent-ly to foster an environment which is conducive for the development of agri-finance.

While setting aggressive indicative credit targets in consulta-tion with banks, SBP has simultaneously ensured that the right tools and policy framework are also made available for the banks to make a strong business proposition in serving their rural clientele. Its interventions not just involve address-ing regulatory barriers but also developing market informa-

tion & infrastructure to address industry bottlenecks and market failures. It has continuously been working to enhance capacity of banks in modern agri-financing and to reduce demand-side barriers such as low financial literacy. The results of these interventions have been impressive! Agri-fi-nancing disbursement which stood at a modest Rs212 billion in FY07-08, has seen splendid growth to reach a remarkable figure of Rs391 billion in the outgoing year of 2013-14 with Agriculture Credit Advisory Committee (ACAC) pushing the limits to an even more exigent credit disbursement target of Rs500 billion to be achieved during FY14-15. While a Rs109 billion (28%) jump in credit target over the previous years actual disbursement of Rs391 billion may seem ambitious, the progress so far appears to be promising and speaks volumes for the strong dedication and commitment that the industry players have collectively shown to the cause of promoting agriculture finance. Disbursements for the first eight months of FY14-15 have been Rs289 billion which constitutes 58 percent of the total target of Rs500 billion is 32 percent higher compared to Rs218 billion disbursed in the corresponding period, last year. Numbers speak for this favorable trend indicating a gradual closeout in agri-financing gap between credit demand and supply which has been brought down from 63.5 percent in

Page 15

FY10 to 47 percent in FY14, and continues to shrink further with the exponential growth in targets and their achievement.The growth in agri-credit supply has gained momentum in recent years to surpass the growth in agri-GDP. With each passing year, new boundaries are being defined to deepen the roots of agri-credit and encompass an increasing number of farming households into the formal financial ambit. Amid an environment where private sector credit is dwindling and crowding out is being chanted as headline news, this favorable trend is corroboration of the fact that the grass is turning greener against all odds. To augment this stellar performance, banks have also managed to increase the outstanding portfolio by Rs34 billion to Rs308 billion along with curtailing the non-performing loans to 11.4 percent of the total portfolio as against a previous figure of 13.8 percent. Alongside these achieve-ments, the agri-financing landscape has also changed for good. Where the overall pie has grown in size, a shift in market share has also been witnessed away from the traditional approach of specialized and government led financial institutions being the only significant players in agri-lending to a more market led model wherein private sector banks are increasingly exploring opportunities in what was previously an unchartered territory.

At present, the number of participating financial institutions has risen to 33 financial institutions (as opposed to only 20 institutions in 2010) which not only include the top-tier commercial banks and specialized institutions but the horizon has been widened to include microfinance and Islamic banks into the agri-financing ambit too. For instance, while the agri target of ZTBL in absolute terms has grown, its market share has shrunk from 31.6 percent in 2007-08 to 18 percent in 2014-15, indicating healthy market competition. To achieve its mission of providing an enabling environ-ment for the growth of agriculture finance, SBP has taken a holistic approach which goes beyond the old-school approach of policy framework and regulatory purview to thoroughly cover aspects of risk, technology, innovation and capacity building. SBP has taken initiatives to promote agri-financing to bring depth, inclusion, eiciency and stability into the system. As an illustration to its approach, State Bank has aided in mitigating significant risk of crop financing through its Crop Loan Insurance Scheme (CLIS) with significant funding support by the Federal Government for subsistence farmers. The eectiveness of this can be witnessed in the 2010-11 floods wherein claims of over Rs1.4 billion were paid to farmers which significantly reduced the infection potential of banks agriculture portfolio besides giving relief to the farmers. CLIS has played a pivotal role the in robust growth of agri-credit disbursements. Besides benefiting large borrowers of aected areas it has also strengthened the trust of banks in financing to farmers exposed to the vagaries of nature and that too at the time of fast emerging global climate change. Livestock contributes half of the agriculture GDP, however largely remained unattended by formal financing. To address the inherent risk of livestock financing, Livestock Loan Insurance Scheme has also been introduced through

which, it is hoped that financing will be channelized to this important area too, which is crucial to the overall growth and wellbeing of the agriculture segment. To stimulate demand for formal credit, SBP has been closely involved in capacity building initiatives. Through its Farmers Financial Literacy Programs, SBP has targeted thousands of farmers in all provinces and AJK to educate them about managing personal finances and proper loan utilization which are essential life skills for combating poverty. Over 90,000 farmers have been touched in over 2000 grass root level programs conducted by SBP trained field sta since 2012. SBP has been a proponent of innovation and technology and has shown its strong commitment and support for all initiatives that can add value to its mission of developing agri-finance as a viable business line. Through donor funded initiatives such as Financial Innovation Challenge Fund (FICF) under the DFID-funded Financial Inclusion Program, SBP has worked on and supported numerous innovations which continue to transfer benefit to an increasing number of rural

households. One such intervention is the promotion of Information and Communication Technology (ICT) which oers the prospects of enhancing the delivery of a wide array of financial products to reach a greater number of agricultural clients. Also, SBP is supporting establishment of warehouse receipt financing system in the country to address the issues of post-harvest losses and collateral management against commodities to benefit small farmers. On the policy front, SBP has revised Prudential Regula-tions for Agri-financing to remove regulatory impediments and bring fluidity to the flow of credit to the farming commu-nity. Under the revised PR, banks are required to develop an agri-finance strategy and include agri-credit in the key performance indicators of the respective oicials. SBP has also issued guidelines on various subjects such as Value Chain Contract Farmer Financing, Horticulture, Fisheries and Poultry Financing and Islamic Financing; to stimulate banks into exploring business potential in each of these areas. Through constant support and feedback, the central bank is helping banks in developing products and the required expertise to venture into these fields that have so much to oer in terms of profitability, economic growth as well as other social benefits.

Over arching these initiatives is SBPs target allocation and monitoring function wherein SBP works closely with banks to ensure challenging targets are set and utmost eorts are made to achieve them. It is through constant monitoring and feedback that progress is ensured and any deviations are addressed in a timely manner. Other than quarterly meetings with regional management to review performance and address issues, SBP plays a facilitation role to provide maximum support to banks so that they dont fall short of their targets. The result of this constant push can be seen in a steep upward trend of agri-credit targets where disburse-ments are continually surpassing targets. The growth in agri-credit has continued to outpace the growth in agricultur-al value-added in GDP and is fast catching up to bridge the gap between credit demand and supply. Disbursements for the first half of FY14-15 have been Rs219.5 billion which constitutes 44 percent of the total target of Rs500 billion is 38 percent higher compared to Rs159.4 billion disbursed in the corresponding period last year.

They say the journey of a thousand miles starts with a single step. The single step taken towards incubating agriculture finance has started to bear fruit. Change has come in the form of a move from mandatory to market-based regime, from cooperatives to commercial banks, from sharing of bonafide losses to credit guarantee schemes and banks willingly financing agriculture. Going forward, the most critical challenges are inclusion of majority small and marginalized farmers, addressing geographical imbalances and financing to non-crop activities, which will lead to enhancing the share of agri-credit in banks advances. SBP is committed to continue its eorts to deliver real benefits to the farming community and it is hoped that with the joint eorts of policy makers and the industry, agri-financing would soon emerge as a sound, scalable, and sustainable business segment for banks in Pakistan.

*The writer is a PhD in Economics from the University of Cambridge, UK, presently serving as the Director of Agricultural Credit & Microfinance Department at the State Bank of Pakistan, Karachi. He can be reached at:[email protected]


Changing market structure of agri-financingFY07-08

Agri-GDP growth v/s growth in credit supply

FY14-15

BR Research: Is the local banking system geared up to finance upcoming energy projects like LNG?Atif Bajwa: The banking sector is keen to finance the upcom-ing LNG projects. We will assess the sponsors, suppliers and technology, and will play our role in these projects. However, the banking sectors capacity to finance large projects in the infrastructure space is still limited and is dependent only on loans, which should not be the only way to finance a project. Eicient local capital markets are the foundation for a thriving private sector. Access to finance for the private sector, and particularly for small and medium businesses, is severely constrained due to lack of fully developed capital markets. The development of the local capital market needs to be at a much faster pace as it is not suicient to depend solely on the lending capacities of banks to generate investments. Banks need to take into account their risk appetite and cannot be excessively exposed to risks in any particular sector. The banking sector is already overly exposed to risks associated with the energy and power sector. Concerted eorts need to be taken to not only set up private equity funds, but also to formulate eective rules and regulations that provide a conducive environment for new investors to enter the market. Encouraging investors will play a catalyst role in financing infrastructure projects.

BRR: How was the banking sectors performance in 2014?AB: During the year, the banking sector took full advantage of the major re-composition of Pakistans domestic government debt by increasing investments in Pakistan Investment Bonds (PIBs). This window of opportunity was available for a limited period and the yields have now dropped significantly. Banks with excess liquidity were able to transfer their short-term investments into long-term bonds and earn higher yields. Bank Alfalah also took advantage of the opportunity and now has a government security profile that is ranging from short-term treasury bills to 10-year bonds. At Bank Alfalah, we are pushing to increase private sector lending. However, this is very challenging in an environment where the industry average of NPLs is at 13 percent and economic growth has been static at three to four percent for the last few years. Economic growth needs to increase for investments to take place and for banks to lend more.

The criticism that banks often face for not lending enough to the private sector is sometimes misplaced. Lending generally comes in to support financeable projects only after suicient equity investments have been committed by entrepreneurs. Unfortunately, entrepreneurs are still somewhat shy of making meaningful equity investments for new businesses (barring the usual sectors). It is also important to note that in emerging economies, new project financing is usually undertaken by Development Financial Institutions (DFIs) whereas in Pakistan, complete dependence is on commercial banks for project financing. There is a dire need for DFIs in the country.

BRR: So what will be your strategy in 2015?AB: As a business, Bank Alfalah has never stood still. We have rapidly expanded our network, invested in new technology and built one of the best teams in the industry. As a result, we felt it was time for our brand to reflect who we are and where we are heading. The year 2015 marks a year of new beginnings for Bank Alfalah. This year we will dierentiate ourselves, really connect with our customers and create a world class brand. We have embarked on a journey to re-invent ourselves and create a new vision for the Bank. The new Bank Alfalah brand tells the story of how we have always been dierent and how we have defined our own rules of success. That spirit gives us license to challenge the market, to shake things up and stand for something nobody else stands for. Customers are the focal point of Bank Alfalahs business model. Understanding our customers needs, developing innovative financial solutions and building long-term relation-ships are the foundations of our commitment to our customers. With our strategic thrust heavily focused on customer centricity, we strive to harness and deliver innovative, responsible and sustainable financial solutions for our customers. We will continue to focus on consumer, SME, commercial and large corporate clients. Being the leading consumer lender, Bank Alfalah has an advantage and we will strengthen our consumer portfolio going forward. Small and medium enterprise growth is also a focal point of our strategy and prudent, responsible lending will be extended to support this critical area of our economy. Bank Alfalahs SME business understands the holistic needs of our customers and provides complete SME Banking solutions to them. We are

looking to provide end to end solutions, which focus on meeting the financial, non-financial, transactional, investment and advisory needs of our SME customers. This year, through our branchless banking network, we will also launch automat-ed financial services for SME and micro retailers with the aim to include the masses into the financial mainstream. BRR: What is Bank Alfalahs plan for its Islamic banking segment?AB: Islamic banking is a high growth segment because of the growing demand. With a network of 157 dedicated branches across the country, Bank Alfalahs Islamic banking business continues to serve as the one of the largest Islamic banking oering in Pakistan. Bank Alfalahs Islamic banking business was awarded the 'Best Islamic Banking Window of a Commer-cial Bank in Pakistan' by the Global Islamic Finance Award, which is considered one of the most prestigious awards in the field of Islamic banking. Going forward, we plan to maintain our strong position in this sector. We are keen to spin o our Islamic window operations into a subsidiary over a period of time, as also encouraged by the State Bank. The Islamic banking environment is becoming very competitive as more banks are coming in. The SBP is rigorously working to provide a conducive environment for Islamic banking. However, there is a need to build asset and invest-ment classes. Islamic instruments need to be developed to cater to the unique needs of customers.

BRR: How has been your experience with branchless banking?AB: Bank Alfalah launched Mobile Paisa, its branchless banking services in collaboration with Warid Telecom last year. Mobile Paisa oers customers over the counter bill payments and money transfer facilities at more than 15,000 agent locations nationwide. Within less than six months, we have registered a four percent market share and plan to grow. With the launch of Mobile Paisa, the Bank aims to support the creation of a branchless banking and alternate payments ecosystem, which is likely to augment financial inclusion in the country, reducing the gap between the banked and the yet-to-be-banked. Going forward, I am confident that Bank Alfalah will continue to innovate and perform well, driven by new product innova-tions and exemplary customer service.

Interview by Ali Khizar & Sidra Farrukh


Debt capital a pressing need

Mr. Atif Aslam Bajwa has been the Chief Executive Oicer of Bank Alfalah Limited since October 27, 2011 and has been its President since November 2011. Mr. Bajwa serves as the President of Abu Dhabi Group. Mr. Bajwa served as the Chief Executive Oicer and President of Soneri Bank Limited until March 2011.

Atif BajwaCEO Bank Alfalah Limited

Definitely, banks couldnt have asked for more in CY14! Followed by a lackluster period, banks made a stellar comeback on local bourse this year. As the benchmark KSE100 index gained 27 percent, BR banking index outran with a return of 32 percent. This was both a result of the government raising debt at hefty rates with banks becoming the major lender and the SBP opting for a monetary easing stance as the year came to its close. This gave banks merry-making sessions throughout the year while keeping the sector in limelight on local bourse.

Rising PIB-DR dierential Tripping down the memory lane, long-term bonds i.e. PIBs happened to be the most sought-after investment avenue for most banks as yields oered were too lucrative to ignore. Mind you, the dierential between PIB and discount rate stayed on the higher side, averaging at 281bps versus 188bps between CY12-CY13. This coupled with anticipations of falling

interest rates prompted banks to shift their portfolios to PIBs from treasury bills earlier to lock in higher yields. In the course of chasing hefty yields on risk-free govern-ment securities, bankers set aside their very core objective, thereby restricting their lending to the private sector. This kept the advances-to-deposits (ADR) ratio restricted to 48 percent (CY13: 49 percent), while taking the invest-ments-to-deposits ratio (IDR) to as high as 58 percent. This marks the highest IDR and the lowest ADR in the banking industry ever since 2008 (see graph). Yet, this did not bother banks as risk-free high yields furnished banks with lower Non-Performing Loans (NPLs), increased coverage. With cleaner loan books, the industry now boasts a remarkably high coverage ratio of 80 percent coupled with a lower infection ratio of 12.3 percent as of December 2014.

Besides, income from higher yielding PIBs also triggered the topline growth while augmenting the Net Interest Margins (NIMs). This was also the result of banks mobilising their cost of deposits during the year. With the SBP imposing minimum savings rate on saving deposits, banks were seen expanding the proportion low-cost deposits, thereby keeping their cost of deposits in check. Hence, profitability of the sector witnessed a staggering lift during the year.

Revaluation gains a feast for banksAfter almost a year of stagnant discount rates, the SBP tilted its stance towards monetary easing whereby it slashed the discount rate by 50bps in mid-November 2014 and later by 100bps to 8.5 percent in January 2015. As a consequence, the yields on 10-year bonds tanked to 10.87 percent from as high as 13.45 percent during the year. Hence, with long term sovereign securities now representing a sizeable share in the portfolios of most banks, substantial revaluation gains on PIBs gave banks a fair pick up.

Rising spreads and profitability growthWith a myriad of factors being in favour of this sector, banks made fortunes this year as their bottomline growth remained hefty. Combining all banks, profitability of the sector grew by a healthy 45 percent year-on-year. Mind you, the last two years have been very lackluster for banks. With the profitabili-ty growth remained heartening; the sector succeeded in winning back investors hearts on the stock market.

Banks in 2015:Considering that inflation is thinning out, the discount rate is expected to go down further. Hence, the PIB appeal is likely to lose steam as fresh issues will be oered at lower rates following interest rate cuts. Eventually, banks reliance on sovereign instruments will fizzle out. Till then, banks can capitalize on their existing PIB holdings in the form of revaluation gains. Here, banks with the highest allocation in PIBs will be the clear winners. But sooner or later, restricted NIMs will be the inevitable outcome. In such a case, banks will be propelled to revisit their investment mix by shifting their focus on lending to the private sector. Still, much depends on the willingness of individual bankers to lend as they have been enjoying cleaner books of late. Chances are that banks will be prudent in lending to keep a check on their NPLs and hence aggressive lending is unlikely to be seen in the near future. However, sector analysts are of the view that economic revival and improving energy situation in the country will carry the potential of taking credit growth in double digits. Analysts also believe that baking profitability appears to be relatively secure considering the dependency of banks on income from PIBs coupled with the linkage of deposit rate with the repo rate as interest rates move south. One sticky situation for banks in CY15 could be the regula-tion of banking spreads. To recall, banks have been reveling in generous spreads in recent times. But with SBP pulling the strings of bankers to confine their spreads to 4.5 percent, the bankers with healthier spreads are likely to bear the brunt.


The writer is a Research Analyst at Business Recorder.

A look back to banks in CY14

A look back to banks in CY14Rabia LalaniRabia LalaniRabia Lalani

Draft mortgage recoverylaws to be finalized soon

Ashraf Wathra | Governor, State Bank Of Pakistan

BR Research: With inflation trending around 4.5 percent, dont you think the policy rate is still too high?Ashraf Wathra: We should not be riding only on international oil prices. We need to see other improvements and watch the external sector as well. Therefore, we should not be moving in haste with policy rate adjustments. Our approach will be cautious and measured.

BRR: Talking about external account, how can we control non-essential imports?AW: That is certainly a point of concern for us. Some of the non-oil, incremental imports are justified because it relates to textile machinery and equipment, which will be used for productive purposes and ultimately, exports. But a chunk of

those imports are, in my view, quite non-essential. We had a meeting with banks some days ago and I made that point with the banks that they must themselves take measures to cur

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