Journal of the Institute of Bankers Pakistans3.amazonaws.com/zanran_storage/ and Promotion Pocess 30 IBP ... Mr. Abbas D. Habib Member ... Dubai Islamic Bank Pakistan Limited,

IBP – the knowledge institute

Journal of the Institute of Bankers Pakistan

Volume 73 - Issue No. 3 July – September 2006

Contents

From the Chief Executive’s Desk 1

Editorial:Federal Budget, 2006 – 2007 3

Budget Breakfast Forum 7

IBP Knowledge Endeavours 15

ISQ – The Fast Rising Star 21

Knowledge Power House: Touching New Heights 27

IBP – Strategic Partner in Recruitment and Promotion Pocess 30

IBP – University Knowledge Partnership 32

The Impact of Non-Interest Income on Diversification, Financial Performance and Riskiness at Commercial Banks in Pakistan 33

Credit Risk Management System 49

Credit Guarantee Scheme For SMEs 61

A Survey of Internet Banking Websites of Pakistan 67

Legal Decisions Affecting Bankers:Chattel Fitted to Earth orBuilding – Whether or Not Exempt From Attachment 75

Questions and Answers onPractice & Law of Banking 79

Payment of Cheques and Forgery (Article in Urdu)

Council

Dr. Shamshad Akhtar ChairmanMr. S. Ali Raza MemberMr. Aftab Ahmad Khan MemberMr. Zakir Mahmood MemberMr. Mohammad Aftab Manzoor MemberMr. Khalid A. Sherwani MemberMr. Abbas D. Habib MemberMs. Zarine Aziz MemberMr. Badar Kazmi MemberMr. Atif R. Bokhari MemberMr. Zaigham Mahmood Rizvi MemberMr. Muhammad Saleem Umer Chief Executive

Committees and Boards

Academic BoardMr. Badar Kazmi ChairmanMs. Zarine Aziz MemberMr. Ozair A. Hanafi MemberMr. A.B. Shahid MemberMr. Tahir Ali Tayebi MemberMr. M. Naveed Masud MemberDr. Mirza Abrar Baig MemberDr. Khawaja Amjad Saeed MemberMr. Abdul Ghafoor Member

Finance CommitteeMr. Inam Elahi ChairmanMr. Khalid A. Sherwani MemberMr. Azizullah Memon MemberMr. Safar Ali K. Lakhani MemberMr. A. Saeed Siddiqui Member

Audit CommitteeMr. Aftab Ahmad Khan ChairmanMr. Abbas D. Habib MemberMr. Masood Karim Shaikh Member

H.R. Committee Mr. S. Ali Raza ChairmanMr. Aftab Ahmad Khan MemberMr. A. Saeed Siddiqui Member

Building CommitteeMr. M. Shafi Arshad ChairmanMr. Shameem Ahmed MemberMr. Mohammad Bilal Sheikh MemberMr. Kamran Rasool MemberMr. Tasadduq Hussain Awan MemberMr. Khalid Niaz Khawaja MemberMr. Barbruce Ishaq Member

Editorial BoardMr. Aftab Ahmad Khan ChairmanMr. M. Ashraf Janjua MemberDr. Shahid Hasan Siddiqui MemberMr. Jalees Ahmed Faruqui MemberMr. A.B. Shahid MemberProf. S. Sabir Ali Jaffery Member

Board of Turstees of Staff Provident FundMr. Inam Elahi ChairmanMr. M. Hanif Akhai MemberMr. Muhammad Saleem Umer MemberMr. S.M. Ashique Member

AuditorsMessrs Taseer Hadi Khalid & Co.Chartered Accountants

Registered OfficeThe Institute of Bankers PakistanMoulvi Tamizuddin Khan RoadKarachi — 74200 Pakistan.UAN : 111-111-564 Fax : 5683805Phones: 5680783-5689718-5686955

5684575-5687515-5689364Website : www.ibp.org.pk E-mail : [email protected]

The Institute of Bankers Pakistan

Published by: Mr. Muhammad Saleem Umer for the Institute of Bankers Pakistan, Moulvi Tamizuddin Khan Road, Karachi.The Journal of the Institute of Bankers Pakistan is published quarterly and is provided free to members. Non-members may obtain copies of the Journal from the Institute and/or IBP Local Centres on payment.

Printed at: The Times Press (Pvt) Ltd., C-18, Al-Hilal Society, Off. University Road, Karachi, Pakistan.

Copyright by: The Institute of Bankers PakistanAll rights reserved.The material appearing in this journal may not be reproduced in any form without prior permission of the Institute of Bankers Pakistan.

July - September 2006 Issue



From the Chief Executive's Desk

The beginning of new financial year has

brought in its wake new challenges and

opportunities for the Institute. It is, therefore, time

for the Institute to review its performance of last

financial year and make plans for the future.

The last financial year was heavily loaded with

a good number of knowledge initiatives and their

implementation. The volume of activities during

the entire period was all time high leaving little

time for the IBP family to sit down and have a

focused vision for the times to come. Briefly,

following elements of knowledge spectrum were

demanding heavily on the intellectual and physical

resources of IBP:

1. IBP Superior Qualification (ISQ)

The rigorous exercise initiated last year finally

culminated into launching of IBP Superior

Qualification (ISQ) on January 23, 2006. In less

than two months time over 2,400 entries were

received for the first examination conducted in

May, 2006. The challenge to follow was to set a

new bench mark for release of the examination

result. Al-hamd-o-Lillah IBP family achieved the

target and finalized the result in record time. This

by no means is a small achievement. The second

prestigious tier in the ISQ process is the

Associateship of IBP (AIBP) which is being

launched from this quarter. The first examination

of AIBP is scheduled to commence from

November 13, 2006 side by side with Junior

Associateship (JAIBP) examination.

2. Training and Development

The ability of IBP to offer quality training

programs that meet the varied and rising

expectations of the stakeholders was fully

endorsed by the increasing number of training

programs designed, developed and conducted

throughout Pakistan as well as in Afghanistan. The

number of customized courses, where the

organizations outline their training requirements

and ask for programs tailored to meet their specific

needs, greatly increased. Those who trusted the

Institute's ability to meet the professional

development needs of their human resource

included National Bank of Pakistan, First Women

Bank Ltd., Bank of Punjab, United Bank Limited,

The Bank of Khyber, Zarai Taraqiati Bank Limited,

Soneri Bank Limited, Hongkong & Shanghai

Banking Corporation Limited, Dubai Islamic Bank

Pakistan Limited, Meezan Bank Limited, Mybank

Ltd. and Standard Chartered Bank Ltd.. Long

term customized courses were held for them. The

list of such institutions is becoming more and more

impressive with the addition of new organizations

posing a real challenge for the Institute to come up

to their expectations.

3. Partnership in Recruitment and

Promotion Process

IBP is conducting Written Tests, Group

Discussions and Selection Interviews for its 16

partner institutions including State Bank of

Pakistan. During the calendar year 2005, IBP

received demands from over a dozen institutions

and was able to enlist over 30,000 participants

throughout the country for recruitment and

selection of capable staff for them. Such tests were

conducted at 8 to 10 centres simultaneously. IBP

has the capacity to conduct such tests even outside

Pakistan such as UAE, Saudi Arabia, U.K., USA,

Canada and elsewhere in the world in

coordination with its Overseas Coordinators.

4. Integration with the Universities

IBP knowledge partnership with seven

Universities is now bearing fruits as each year over

100 students receive focused and relevant

education and training on Banking and Finance.

Besides training, they are provided 3-month

Supervised Internship during each year of MBA

program. University graduates are now entering

into the banking industry and are performing very

well.

July - September 2006 Issue 1

5. Research and Publications

IBP has decided to bring out focused books on

each subject of its curriculum written by the subject

experts for the benefit of knowledge seekers,

whether listed for ISQ, pursuing their MBA

program or engaged in upgrading their

qualification in other dimensions. The prices of all

such publications are kept low in order to ensure

wider circulation and dissemination of knowledge.

Besides books, IBP brings out Weekly Economic

Letter on every Saturday. The Economic Letter is

gaining wider acceptability throughout the

financial services sector, corporates and academia.

IBP quarterly Journal is also being issued regularly

and is actively participating in the dissemination of

current literature and ideas for the benefit of its

over 12,000 recipients.

To encourage research, IBP has been holding

annual Essay Competition on topical subjects. The

Research Essay Competition will henceforth be

held bi-annually. The first three prize-winning

research papers in each of the two competitions

will be awarded prizes and published in IBP

Journal.

A journey which began in the year 1951 is

progressing well. Yet, there is still a lot of room for

improvement in every dimension and knowledge

pursuit.

July - September 2006 Issue2


Our VisionTo be the premier

financial sector knowledge institute

of international standard and repute.

Our MissionTo train and develop

a sound human resource base

for the financial sector and to work for

continuous learning, adaptation and

application of knowledge.


Editorial

Federal Budget2006 – 2007

The budget, as is well known is the principal

instrument for the implementation of economic

and social policies of the government. It is more

than a mere balancing of public revenues and

expenditures. It is an intricate process of

coordinating the requirements of macro-economic

management with the exigencies of politics and of

matching national vision with practical possibilities.

Aside from the provision of crucial services

such as defence, education and health as public

goods, government budgeting is also an important

instrument for re-distributing income and wealth,

promoting employment, alleviating poverty and

for ensuring economic stability. Furthermore,

budgetary operations have a profound impact on

price level, balance of payments, rate of national

savings and on the size and pattern of

development outlays. There is, as a matter of fact,

no aspect of economic activity which can escape

being affected by budgetary policy. If budgetary

policy is not consistent with other economic and

social reforms, the outcome may not be upto the

expectations of policy makers.

The budget for 2006-07 is a part of the

Medium Term Development Framework (MTDF)

covering the period 2005-10 that has set the goals

for major economic variables of the country. The

key objective of the MTDF is to sustain a high rate

of economic growth with macro-economic

stability. It envisages an annual growth rate of 7.6

percent in real Gross Domestic Product (GDP)

supported by average annual growth rates for

agriculture at 5.2 percent; manufacturing sector at

11.6 percent; and services at 7.3 percent.

In over-all terms, it can be stated that the

budget for 2006-07 represents a well thought out

and balanced attempt to promote investment and

growth with accent on employment generation

and poverty alleviation in a milieu of economic

and social stability.

The total expenditure proposed in the budget

is Rs 1315 billion which represents an increase of

19.7 percent over 2005-06 budget estimates. It is

higher by 6.7 percent than last year’s revised

estimates of Rs 1232.5 billion. The share of current

expenditure in total budget outlay for 2006-07 is

Rs 880 billion which is 4 percent less than the

revised estimates of 2005-06 (Rs 918.8 billion).

Development expenditure proposed in FY 2006-

07 budget is Rs 435 billion which represents an

increase of 38.7 percent over the revised estimates

of 2005-06 (Rs 313.7 billion). The federal

component of development expenditure is

estimated at Rs 320 billion which includes Rs 50

billion for earthquake reconstruction and

rehabilitation programme. The share of

development expenditure in total budgetary outlay

has increased significantly to 33.1 percent as

against 25.5 percent in 2005-06.

Debt servicing (Rs 295.8 billion) and defence

(Rs 250.18 billion) account for 62 per of current

budgetary expenditure. While the dimensions of

defence expenditure are determined by security

considerations, the large size of debt service

payments is attributable to substantial government

borrowings to finance budget deficits for a number

of years. Government borrowings, while helpful in

sustaining a high expenditure level without

commensurate tax efforts, created a major

problem in subsequent years in the form of

massive interest payments.

It is heartening to note that the present

government is assigning high priority to public debt

reduction and has adopted a multi-pronged

strategy to tackle this problem effectively. The

principal elements of this strategy are: (i) revival of

economic growth by enlarging development

spending and enhancing its productivity by

improving governance and by identifying areas

that would provide the highest return in a short


period of time; (ii) improvement in debt carrying

capacity through increasing revenues by

broadening the tax base, improving tax

compliance and strengthening tax administration;

(iii) reducing the large losses of state owned

enterprises; (iv) reducing the real cost of

borrowing; and (v) eliminating government

borrowing for current expenditure in the medium

term.

The recently enacted “Fiscal Responsibility

Law” would limit government’s access to

borrowing and would ensure responsible fiscal

management.

There has been a commendable reduction in

debt-to-GDP ratio from 85 percent in June 2000

to 61.4 percent by the end of June 2005. This

represents 23.6 percentage points decline in the

country’s debt burden in five years. By end March

2006 public debt further declined to 54.7 percent

of the projected GDP for the year. During the last

six years there has been a sharp decline in the debt

servicing liabilities from 65.4 percent of revenues

in 1999-2000 to 27.8 percent of revenues and

from 53.6 percent to 27.8 percent of current

expenditure in 2005-06.

Defence expenditure at Rs 215.18 billion

represents an increase of 3.8 percent only over the

revised figure of Rs 241.06 billion in FY 2005-06

and would constitute 2.8 percent of the projected

GDP.

The target for over-all revenue collection in

2006-07 is Rs 1083 billion which is 16.8 percent

higher than the previous fiscal year’s estimate. Tax

collection by the Central Board of Revenue (CBR)

is targeted at Rs 835 billion – up by 18.6 percent

against the revised estimates (Rs 704 billion) of

2005-06. The yield from direct taxes is estimated

at Rs 267.0 billion while the target for indirect

taxes is Rs 568 billion.

The government estimates an inflow of Rs

239.4 billion from external sources in 2006-07.

This includes Rs 213.4 billion from foreign loans

and grants amounting to Rs 26 billion. Foreign loans

and grants in 2005-06 amounted to Rs 234 billion.

The provincial share in net revenue receipts in

2006-07 is estimated at Rs 378 billion - 19 percent

higher than the 2005-06 estimate of Rs 331 billion

for such transfers.

The people friendly approach of the budget is

evidenced by the fact that Rs 109 billion have been

provided for relief and subsidies. Of this, an

amount of Rs 55 billion is for keeping the price of

electricity at affordable levels in 2006-07. The

government will provide a subsidy of Rs 2.5 billion

to enhance the supply of pulses in the market and

thereby keep their prices stable.

From July 01, 2006 all government servants

will get 15 percent increase in their basic pay as

dearness allowance and there will be 20 percent

increase in pension for pre-May 1977 retirees and

15 percent for after May 1, 1977 pensioners. The

Minimum Wage of worker has been increased by

33.1 per cent, i.e. from Rs 3,000/- to Rs 4,000/- per

month. From grade 1 to grade 16 government

servants’ conveyance allowance has been raised

by 50 percent. Threshold income has been

increased to Rs 200,000 from Rs 100,000 for

income tax purposes for Women; for non-salaried

women this has been increased from Rs 100,000

to Rs 125,000.

To promote savings, the budget proposes

enhancement in the return on National Savings

Schemes which has been increased from 0.5 to 1.5

percent. The welcome step could also lead the

banks to improve the return on their deposits.

The allocations in the Public Sector

Development Program (PSDP) are in line with the

priorities of the government. Rs 35 billion have

been allocated for Khushal Pakistan Program

which will be spent on rural roads, village

electrification, water supply, gas, education, health

and sanitation and leveling of land for irrigation

purposes.

For generation of self-employment, a Rozgar

Scheme with an allocation of Rs 12 billion for

2006-07 is being launched. Educated persons

under this scheme in the age bracket of 18-40

years will get loans for self-employment. The



government will pick up half of the mark up and

the other half will be picked by the person

concerned.

It is hoped that 2006-07 PSDP would create

400,000 additional jobs in the country.

The over-all fiscal deficit for 2006-07 is

estimated at Rs 373.5 billion, which is 4.2 percent

of the projected GDP. This deficit level is quite

sustainable. A sustainable deficit may be defined

as one which is not inconsistent with the stated

targets of inflation containment, viable external

accounts and socially necessary economic growth.

The government hopes that inflation in 2006-

07 would not exceed 6.5 percent. A temptation

which should be avoided in the current fiscal year

(2006-07) is excessive monetization of the deficit

in case of revenue slippage or higher than

anticipated expenditure. This would inevitably

lead to aggravation of inflationary pressures in the

economy.

The adverse impact of high inflation on

resource allocation and income distribution is well

known. The cross-country evidence suggested a

negative correlation between high inflation and

growth.

The negative correlation is strong in the case of

an open market like Pakistan which greatly relies

on private domestic and foreign investment for

promoting growth. High investment is encouraged

by price and exchange stability which plays a key

role in promoting macro-economic stability and

sustaining growth at the socially necessary rate.

Lord Keynes, the greatest economist of the 20th

century has warned us about the evil

consequences of inflation in these words: “There is

no subtler, nor surer means of over-turning the

existing basis of society than to debauch the currency”.

In conclusion, the budget for 2006-07 can be

described as bold, investment oriented and people

friendly. It seeks to promote growth with equity,

while seeking to preserve macro-economic

stability. It is a meaningful response to the complex

and formidable economic challenges confronting

the country.




Budget Breakfast Forum

As an annual feature, the Institute of Bankers

Pakistan holds Budget Breakfast Forum for a

review of the various important components of the

Budget impacting the national economy in general

and the banks and financial institutions in

particular. The Budget 2006-07 was announced

on 5th June 2006. The Institute, therefore,

organized its Budget Forum on 7th June 2006

under the chairmanship of Mr. Riaz Riazuddin,

Economic Advisor, State Bank of Pakistan. Others

who spoke on the occasion were:

1. Post Budget Macro Economic OutlookMr. Aftab Ahmad KhanFormer Secretary FinanceGovt. of Pakistan

2. Budget 2006-07: Opportunities &Challenges - A Banker's Point of ViewMr. Ayaz AhmedSEVP/Chief Financial Officer/MMCHabib Bank Limited

3. Taxation Proposal 2006-07 - AnAccountant's AssessmentMr. S. Masoud Ali Naqvi, FCASenior PartnerKPMG Taseer Hadi & CoChartered Accountants

4. Budget 2006-07 - Key Impacting Factors (KIF)Mr. Muhammad Saleem UmerChief ExecutiveThe Institute of Bankers Pakistan

Speaking at the Forum, Mr. Riaz Riazuddin

underlined the need to make the tax system more

equitable and increase the tax-to-GDP ratio.

He said that tax system in Pakistan is

characterized with a narrow tax base,

disproportionate tax burden on different sectors

and low tax buoyancy contributing to the low tax-

to-GDP ratio. He suggested to the policy makers to

bring all the services with huge revenue potential

under tax net so as to increase the tax/GDP ratio.

He was of the view that the Federal

Government and the CBR have limited ability to

increase the tax/GDP ratio for the reason that the

taxability of two important sectors of the economy

offering enormous revenue potential (agricultural

income tax and sales tax on services) are

provincial subjects. Unfortunately, receipts from

these provincial taxes are not reflective of the share

of these sectors in the total economy, he added.

Mr. Riaz Riazuddin said that widespread

acceptability of sales tax, which is the most prolific

tax in terms of revenue generation in Pakistan, has

increased its share in federal tax receipts from 23.4

percent in FY 99 to 40.00 percent in FY 06. The

ratio of sales tax to GDP has also increased from

2.45 percent in FY 99 to 3.7 percent in FY 06.

However, the services sector which contributed

52.3 percent in the GDP in FY 06 mostly remains

outside the scope of sales tax and the collection of

sales tax/federal excise duty from this sector is very

low. During FY 05, the sales tax/CED collection on

services amounted to Rs 27.9 billion only. The

main chunk of Rs 20.4 billion came from

telecommunication services where tax is collected

from the telephone/fax bills. Other services

contributed Rs 3.6 billion to the total sales tax

collection of Rs 240 billion. The contribution of

retail and wholesale trade to the sales tax collection

was also very small (Rs 3.3 billion), representing

0.26 percent of its value added in the GDP which

amounted to Rs 1251 billion.

To meet the growing challenge of higher

revenue collection, Mr. Riaz said the budget for FY

06-07 has introduced some new taxation

measures, which are aimed at improving resource

mobilization and broadening of tax base in the

country.

He said that the budget is pro-poor and is

aimed at sustaining growth. Over the period from

2001 to 2005, regardless of the fact that poverty


has declined, the income distribution has

worsened in the country. The ratio of the highest

to the lowest quintile, which measures the gap

between the rich and the poor also widened to

some extent from 3.76 in 2001 to 4.15 in 2005.

The gap between the rich and the poor in

urban areas has relatively widened from 10.40 to

12.02. In contrast, the gap between the rich and

poor in rural area remained more or less

unchanged, that is, from 2.22 to 2.19. In this

backdrop, the budget aims to address the issue of

growing rich-poor gap by taxing the richer

segments of the society and by providing relief and

concessions to the poor amounting to Rs 109

billion. The grant of subsidies in various sectors is

to attain the objective of pro-poor growth, he

added

On the expenditure side, he said, defense

spending has been increased to Rs 250 billion

(three percent of the GDP), up Rs 27 billion. The

federal budget on education and health shows

YoY net increase of Rs 2.1 billion and Rs 0.3

billion, respectively; but in terms of GDP there is

no improvement.

Mr. Riaz said that with a budgeted revenue of

Rs 1083 billion, the overall budget deficit (Rs

373.5) is estimated to be 4.2 percent of the GDP

(including earthquake rehabilitation expenditure),

mainly due to the increase in PSDP. This is

consistent with the Fiscal Responsibility and Debt

Limitation Act, 2005.

The CBR has been assigned a target of Rs 835

billion of FY07, which is Rs 131 billion (or 18.6

percent) higher than the current year's revised

target of Rs 704 billion. This will increase the tax to

GDP ratio of CBR taxes from the current 9.1

percent to 9.5 percent. This is seen as a positive

development, he added.

He observed that the budgetary measures

announced in the Federal Budget (2006-07)

broadly focus on providing conducive

environment for economic activity in the country.

In addition, the government's policy of increasing

revenues through broadening the tax base is

implemented through various budgetary

measures.

He said that the government has announced a

huge increase in development spending and

billions of rupees in subsidies on essential

foodstuffs. Of more than 1.3 trillion rupee budget,

Rs 435 billion have been allotted to public sector

development, a 60 percent increase from the

amount of Rs 272 billion allocated in FY06. About

Rs eight billion have been allotted for subsidizing

household essentials, particularly foodstuffs, in

state-run utility stores, up from Rs two billion

currently to ease the impact of inflation, which

currently stands at around eight percent.

Mr. Riaz identified heavy reliance on import-

related taxes and dependence on potentially

volatile non-tax revenues as key fiscal risks. He

suggested to further tax effort to raise the tax-GDP

ratio substantially over the next few years. He said,

the reported plan of the CBR to seek a one

percentage point increase in the tax-GDP ratio in

the next five years needs to be vigorously

implemented.

He said that particular attention needs to be

given to broad basing of the tax net and improving

collections from under-taxed areas of the economy

such as agriculture and stock markets.

The SBP advisor suggested to bring some of

the services (financial services, franchise services,

services provided by foreign exchange and money

changers) in the excise regime. Such taxation

measures would broaden the tax base, mobilize

resources, and make the tax system more

equitable. Nonetheless, the State Bank would like

to see bringing all other services with huge revenue

potential in the tax net, so as to increase the tax-

GDP ratio and make the tax system more

equitable.

Wealth Tax Act, 1963 was suspended (held in

abeyance) from July 1, 2001. Prior to its

suspension, wealth tax contributed nearly Rs 4

billion (in FY00) to the exchequer. In the absence

of wealth tax and given the fact that enormous

capital gains (on sale of property, land, shares,



etc.) are made by the rich segment of society, it

may be prudent to impose and improvement

capital gains tax seriously. This will improve

income distribution in the economy, as the rich will

pay more taxes. This year, the government has

increased the rate of CVT on shares form 0.01 to

0.02% but this will hardly generate significant

additional revenues. The CVT collected from stock

exchanges in Pakistan in FY05 amounted to Rs

2.068 billion, and in FY06 Rs 0.922 billion have

been collected upto March. We can roughly

estimate that this raise in tax rate would fetch an

additional Rs 1.5 billion in FY07.

Mr. Aftab Ahmad Khan in his learned

discourse pointed out that the monetary assets are

growing faster than physical assets and hence the

inflation is on higher side. He observed that

despite aggressive efforts in developing and

maintaining economic growth, we are still a low

income country. The domestic saving is very low

and the parallel economy is thriving. He

expressed his concern over the deficit in trade

balance expected at $ 11 bn and the size of

parallel, undocumented economy around 40% to

45% of the formal documented economy. He

appreciated the ongoing efforts to contain inflation

and keep the deficit financing within approved

limit.

Mr. Ayaz Ahmad dealt with the subject from a

banker's point of view. He appreciated the

government's efforts for documenting the

economy and to bring new segments under the tax

net. He was of the view that the rate of tax should

be higher where computerized identity cards were

not produced. He pointed out that withholding tax

on cash withdrawals of Rs 25,000/- and above has

been raised from 0.1% to 0.2% as also a 5%

central excise duty has been introduced on fee

based income of the financial institutions. He also

emphasized on a realistic approach towards

classification of loans.

Mr. Masoud Ali Naqvi presented a brief SWOT

(strengths, weaknesses, opportunities and

challenges) analysis of the economy. He said that

the consistency in government policy has started

bearing fruit and positive results. He pointed out

that in principle, we are committed to say good-

bye to presumptive tax regime. He observed that

the non-fund based business of financial services

sector, estimated as Rs 25 trillion, may contribute

substantially towards the revenue generation. He

appreciated that a balanced approached has been

adopted in the Federal Budget 2006-07.

Earlier IBP Chief Executive, Mr. Muhammad

Saleem Umer highlighted the key impacting factors

of the budget. He pointed out that the total outlay

of the budget is Rs 1.315 trillion out of which Rs

435 billion are allocated for the Public Sector

Development Program (PSDP). This allocation is

much higher than Rs 272 billion allocated in the

budget for 2005-06. The revenue collections

target of Rs 1.083 trillion is 16.8% higher than the

current year. More details on budget and

economic survey are given separately.

At the prestigious budget breakfast, IBP

released a compendium carrying key elements of

Economic Survey and Federal Budget. This

document was developed by IBP taskforce and

was printed within 24 hours of the release of the

Federal Budget. A selection from this document is

given hereunder:

Features of Budget 2006-2007

a) The budget 2006-07 has a total outlay of Rs

1.315 trillion, including Rs 880 billion for

current expenditure and Rs 435 billion for

development program. The overall size of the

budget is 19.7 percent higher than current

year's Rs 1.098 trillion.

b) The next year's defence expenditure has been

estimated at Rs 250 billion against current

year's revised estimate of Rs 241 billion and

budgeted allocation of Rs 223 billion.

c) The budget 2006-07 has estimated Rs 378

billion transfers to the provinces under net

proceeds of the federal divisible pool against

current year's revised estimates of Rs 331

billion, showing an increase of about 19

percent or Rs 47 billion higher.



d) The estimates for next year's foreign inflows

has been put at Rs 239 billion which is 12.7

percent higher than the current year.

e) An amount of Rs 504 billion has been

earmarked for general public service which

include interest payments, debt servicing and

superannuation allowances. This accounts for

about 57.3 percent of total current

expenditure.

f) The target for next year overall revenue

collection has been estimated at Rs 1.083

trillion, which is 16.8 percent higher than the

current year. This would include a tax revenue

of approximately Rs 841 billion, up by 17.5

percent higher than current year and non-tax

revenue at Rs 242 billion, up by 6.4 percent

over current year's budgeted estimates of Rs

227.3 billion.



Eight Years Budget at a Glance – The Changing Scenario

Financial Years

Financial Years

Sour

ces

Out

flow

s

g) The government expects Rs 239.3 billion

resources from foreign sources compared with

current year's revised estimates of Rs 234

billion. This includes Rs 213.4 billion from

foreign loans and Rs 26 billion grants. Foreign

loans also include Rs 76.4 billion project

loans, Rs 76.5 billion program loans,

Rs 30.2 billion foreign currency bonds and

others. Foreign grants during current year

amounted to Rs 45 billion.

h) In overall terms, the relief and subsidy would

consume about Rs 109 billion, compared with

current year's Rs 83 billion.

i) From 1.7.2006 all government employees to

get 15% increase in dearness allowances.

j) 20% raise in pension for pre 77 retirees; 15%

for post-77 pensioners.



EXECUTIVE SUMMARY - FEDERAL BUDGET 2006 -2007(Rupees in billion)

Outflows 2003-04 2004-05 2005-06 2006-07(Revised)

Debt Servicing 256 265 301 296 Defence 181 194 223 250Grants, Subsidies and others 277 242 303 334Current Expenditure 714 701 827 880

Development Expenditure:Federal Government 107 148 204 320Provincial Government 47 54 68 115

868 903 1099 1315

Inflows Tax revenue 580 655 690 841Non tax revenue 181 141 237 242Gross revenue 761 796 927 1083

Transfer to provinces (211) (239) (284) (378)Net revenue receipts 550 557 643 705

Net capital receipts 40 64 51 16External receipts 145 156 212 239Bank Borrowing 74 45 98 140Privatization proceeds 11 15 20 75Others 48 66 75 140

868 903 1099 1315

PUBLIC SECTOR DEVELOPMENT PROGRAM(Rupees in billion)

Sector 2003-2004 2004-2005 2005-2006 2006-2007Infrastructure 68 87 92 155Social Sector 26 34 73 119Others 19 27 39 46Total-Federal PSDP 113 148 204 320Provincial PSDP 47 54 68 115Grand Total 160 202 272 435

k) Raise in pension from Rs.1000 to 1300 under

EOBI scheme.

l) Compensation for widows of Government

servants by increasing it from 30,000 - 50,000.

m) Minimum wage in private sector raised from Rs

3,000 to Rs 4,000.

n) Rs 35 billion earmarked for the Khushhal

Pakistan Program.

o) Rs. 10 billion allocated in the budget for the

construction of Bhasha-Diamer Dam and three

other major dams in the country.

p) An amount of Rs 50billion million has been

allocated to Earthquake Reconstruction and

Rehabilitation Authority (ERRA)in the PSDP.

q) PSDP is expected to create 400,000 jobs in the

country.

PAKISTAN'S ECONOMY DURING THE

FISCAL YEAR 2005-6

(Source: Economic Survey 2005-2006,

Government of Pakistan)

HIGHLIGHTS

* Under-performance of the agriculture and

manufacturing sectors resulted in GDP growth

of 6.6%, short of the targeted 7% and below

the previous year's 8.6%

* Per Capita Income rose to $847 as compared

to $742 last year. Real per capita GDP grew by

4.7 percent

* Consumer spending rose by 8.1 percent and

investment spending maintained its momentum

at 10.3 percent increase in real investment

* National savings as percentage of GDP stood

at 16.4 percent in 2005-06 fractionally lower

than last year's level of 16.5 percent. Domestic

savings stood at 14.4 percent of GDP in 2005-

06 slightly lower than 14.5 percent of GDP last year

* Overall investment reached at 20 percent of GDP

* The services sector, with 52% share in overall

economy, grew by 8.8 percent against the

target of 6.8% with banking and financial

services sector growth at 23% as against

targeted 6.7%

* Agriculture and particularly its crop sector

could not perform up to the expectation and

registered a contraction in growth. Livestock

has been the only saving grace as it pulled the

overall growth in agriculture to 2.5 percent as

against the target of 4.2 percent

* Large-scale manufacturing grew weaker-than-

expected by 9.0 percent as against 15.6

percent of last year and 14.5 percent target for

the year

* Fiscal deficit rose to 4.2% against projected 3.8%

* Current account deficit for July-March FY05-

06 rose to $4.7 billion from $1.2 billion

* Foreign Direct Investment up to April 2006

was $3 billion and is expected to rise to $3.5

billion or 2.5% of GDP.

1. Tight monetary policy stance is likely to

continue until inflationary pressures are

significantly eased off. The money supply

during July-April 22, 2006 of the current fiscal

year expanded by Rs.294.9 billion or 10

percent approximately as against an expansion

of Rs.332.4 billion or 13 percent in the same

period last year. The pace of monetary

expansion remained well within the Credit

Plan target for the year (12.8%).

2. The manufacturing sector continued to be the

largest recipient of bank credit, amounting to

Rs.130.0 billion during July-March 2005-06 -

17.1 percent more than the comparable period

of last year and accounting for almost 48

percent of the credit to private sector

businesses. The growth in consumer loans

remained robust, and their scale expanded by

27 percent to Rs. 67.2 billion. The consumer

loans were acquired to finance automobiles

(Rs.23.2 billion), personal loans (Rs.21.5

billion), credit cards (Rs.10.4 billion) and

house building (Rs.10.1 billion). Credit to the

agriculture sector also remained consistent

with the previous year trend. Scheduled banks

and DFIs advances to SME sector witnessed a

growth of Rs.40.6 billion during July-February



FY06 compared with an expansion of Rs.59.9

billion in the same period of last year.

3. The scheduled banks have opened 304 offices

during the period from 01-04-2005 to 31-03-

2006. During July-March 2005-06, there was

an increase of Rs.304 billion (17.3%) in the net

advances of the scheduled banks. Their

deposits increased by Rs.273 billion (11.5%)

and their total investments increased by Rs.77

billion during the first nine months of the

current fiscal year. Within the overall Micro-

Finance Sector Development Program

(MSDP) framework, Khushhali Bank (KB) now

serves nearly 250,000 clients, with a

cumulative disbursement of over Rs.6.0 billion

in 75 districts of Pakistan. As reported, 60

percent of KB's clients are in the rural areas,

roughly one-third being women.

4. From July 05-April 06, inflation as measured

by the Consumer Price Index (CPI), declined

to 8.0% from 9.3% in the same period last

year. Food price inflation averaged at 7.0%

compared to12.8% for the same period last

year. Non-food inflation increased to 8.8%

versus 6.9% in the comparable period of last

year. Core inflation, which excludes food and

energy costs from the headline CPI, also

remained almost at last years' level of 7%. The

larger contribution toward the overall CPI

inflation come from Non-food, House rent,

Energy and transport components of CPI.

5. An overall fiscal deficit stood at Rs.327.3

billion or 4.2 percent of GDP. This revenue-

expenditure gap was financed through

external and domestic sources. The revenue

deficit further progressed towards almost

elimination at 0.03 percent of GDP in 2005-

06. The public debt-to-GDP ratio declined to

61.4% by the end of June 2005 from 85% in

end June 2000. By end March 2006, public

debt further declined to 54.7 percent of the

projected GDP for the year.

6. Exports during July-March of the current fiscal

year are up by 18.6 percent. Pakistan has

increased its trade-to-GDP ratio from close to

26 percent in 1999-2000 to an estimated 34

percent in 2005-06. Imports, on the other

hand, have risen by 43 percent in the first nine

months (July-March) of the current fiscal year.

Pakistan's imports are expected to be higher

owing to rising oil prices as also increased non-

oil imports. Major contributors to the

substantial rise in food imports include wheat,

sugar and pulses. In fact, if sugar production

had remained normal and no shortages had

emerged during the year, food imports would

have risen only by 9.3 percent. Non-food non-

oil imports also grew by 38.3 percent,

reflecting continued strong domestic demand.

7. As percentage of projected GDP for the year,

the current account deficit stood at 3.7 percent

as against 1.1 percent in the same period last

year. The flow under long-term capital (net)

improved and has risen to $3.9 billion from

$1.6 billion last year.

8. External debt and foreign exchange liabilities

were reduced from U.S. $38.9 billion in 1998-

99 to $ 36.5 billion by end-March 2006.

Besides, Pakistan issued US$500 million new

10-year Eurobond and US$300 million new

30-year Bonds in the international debt capital

markets. This transaction raised significant interest

amongst international Institutional investors.

9. In Pakistan, labour force participation is

estimated on the basis of the Crude Activity

Rate (CAR) and the Refined Activity Rate

(RAR). The CAR is the percentage of the

labour force in the total population while RAR

is the percentage of the labour force in the

population of persons 10 years of age and

above. The figures both for CAR (32.8%) and

RAR (46.9%) for the first half of 2005-06 fare

higher than LFS 2003-04 (30.4% and 43.7%).

Agriculture still accounts for the largest source

of employed work force. The share of

agriculture in employment has increased from

43 percent in 2003-04 to almost 45 percent by

mid of 2005-06. Sector wise break up of

employed labour force shows that female

labour force participation is on the rise for most

sectors especially agriculture, fishery and

telecom sectors.




IBP Knowledge Endeavours

TRAINING AND DEVELOPMENT OF

HUMAN RESOURCES

During the quarter April - June 2006, IBP

continued its endeavors for professional

development of human resource of banks and

financial services sector. Overall, the Institute held

27 courses - 14 in Karachi, 12 at its local centers

and 1 at small centre under mobile training

program. Over 666 participants from banks and

financial institutions received training under these

programs. In aggregate, 47 days of training was

imparted. Details of the courses held at Karachi

and other centres are given below:

EVENTS AT KARACHI

S. No. Courses Title Resource Persons

1. Prudential Regulations for Corporate & Mr. Allauddin Achakzai

Commercial Banking

1. Prudential Regulations for Corporate & Mr. Allauddin Achakzai

Commercial Banking

2. Exchange Rate Risk Management Mr. Sadruddin Pyarali

3. Banker-Customer Relationship Mr. Razi Mujtaba

4. Trade Finance: Operations, Risks & Control Dr. Asrar H. Siddiqui,

Mr. Abid Aziz Merchant,

Mr. Razi Mujtaba

5. Cash Flow Based Lending Mr. S. Khaleeq Ahmed

6. Dynamics of General Banking Mr. Razi Mujtaba

7. Working Capital Financing Mr. Murtaza Y. Rizvi

8. SBP Guidelines on Risk Management Mr. Jameel Ahmed

9. Introduction to Derivatives Mr. Razi Mujtaba

10. Analysis & Interpretation of Financial Statements for

Lending Decisions Mr. Murtaza Y. Rizvi

11. Auditing Foreign Trade Operations Mr. Ghazanfar Ali

12. Understanding Letter of Credit Mr. Razi Mujtaba

13. Assets and Liabilities Management Mr. Sadruddin Pyarali

14. Banking Secrecy and Compliance Mr. Razi Mujtaba


Besides the courses mentioned above, the

following knowledge events were also held at

Karachi during the quarter under report:



1. CERTIFICATE COURSES

1. Islamic Banking

As per desire of the IBP Council to hold

certificate courses on "Islamic Banking", the

Institute held a certificate course on the subject

from April 19-22, 2006. Mr. Hassan Aziz

Bilgrami, President & CEO, Bank Islami

Pakistan Ltd. inaugurated the program and

delivered an illuminating lecture on the

subject. 18 executives & senior officers from 7

institutions attended the program. Following

resource persons shared their rich knowledge

on the subject:

1. Dr. Muhammad Zubair Usmani

Sharia Advisor, Islamic Banking Division

MCB Bank Ltd.

2. Dr. Muhammad Imran Usmani

Sharia Advisor

Meezan Bank Ltd.

3. Mufti Muhammad Najeeb Khan

Sharia Advisor

Habib Bank AG Zurich

4. Mr. Shafqat Mahmood Mufti

Joint DirectorIslamic Banking Department

State Bank of Pakistan

5. Maulana Hassan Kaleem

Sharia Advisor

AlBaraka Islamic Bank B.S.C (E.C.)

6. Mr. Muhammad Imran

Head of Islamic

Banking Standard Chartered Bank

7. Mr. Muhammad Raza

Head of Liability Products & Service Quality

Meezan Bank Ltd.

8. Mr. Sohail Khan

Head of Human Resource & Administration

Meezan Bank Ltd.

2. Effective Branch Management

The third batch of high-value certificate course

on "Effective Branch Management" was held

from March 2006 to June 23, 2006. This series

of 120-hour rigorous programs, designed by

IBP Academic Board and approved by the

Council, covers core banking as well as soft

skills needed by the Branch Managers. Besides

Karachi, the course was also held in Lahore,

Rawalpindi and Peshawar. In all, 76 Managers

attended this program.

2. CUSTOMIZED COURSES

Besides regular programs, IBP also holds

customized training courses tailored to meet

specific needs of banks. During April - June 2006,

the Institute held eight courses for the following

banks:

1. 12-week course for Management Trainees of

Soneri Bank Limited. The course concluded

on May 19, 2006 at Karachi. 25 Management

Trainees attended the course.

2. 12-week course for Management Trainees of

United Bank Limited. The course concluded

on June 09, 2006 at Karachi. 16 Management

Trainees attended the course.

3. Two 2-week courses for Graduate Trainee

Officers of Meezan Bank Limited from March

18 - April 07, 2006 at Karachi and Lahore. 50

Graduate Trainee Officers attended the

courses.

4. 6-week course for Graduate Trainees of the

Bank of Punjab from April 03 - May 02, 2006

at Lahore. 39 officers attended the courses.

5. 4-week course for Audit Trainees of National

Bank of Pakistan from May 03 to May 30,

2006 at Karachi. 16 Trainee Officers attended

the course.

6. 6-week course on "Effective Branch

Management" for Lady Managers of National

Bank of Pakistan. The course is in progress

from June 02, 2006. 24 Lady Managers are

attending the course.

7. 4-day courses on "Banker - Customer

Relationship" for the employees of the Hong

Kong and Shanghai Banking Corporation at

Karachi, Lahore and Rawalpindi. 45 officers

attended the courses.

8. 4-day course on "Murabaha and Ijarah" for the

employees of Dubai Islamic Bank Pakistan

Limited from June 08 - 12, 2006 at

Rawalpindi. 25 executives and officers

attended the course.

Beginning July 2006, following customized

programs are scheduled:

1. 6-week course for the Management Trainees of

the Hong Kong and Shanghai Banking

Corporation Ltd.

2. 4-week training for the Management Trainees

of ABN Amro Bank N.V.

3. 4-week training for the Management Trainees

of Allied Bank Limited

4. Series of courses for Dubai Islamic Bank

Pakistan Limited.

3. WORKSHOPS/TALKS BY FOREIGN

AND LOCAL SPEAKERS

From time to time, the Institute invites eminent

personalities from within the country and abroad

for sharing of their knowledge and experience with

executives and officers of banks and financial

institutions in Pakistan. During the period under

report, the Institute organized following events:

i. The Institute organized a highly motivational

workshop on "Igniting the Untapped

Potential". Mr. Azim Jamal, a world renowned

inspirational speaker and corporate sufi

conducted the workshop. The program was

well attended.

ii. The Institute also held an illuminating dinner

talk on "Business Continuity Plan". Mr. Ian

Charters, Chairman, Education Committee of

Business Continuity Institute, U.K. delivered

the talk. It was attended by large number of

executives, senior officers and young bankers

of different banks and other organizations.

iii. Similarly, a talk on "Demystifying Hundi

Business" was arranged. Mr. Hanif Akhai,

former SEVP, HBL and presently Chief

Executive Officer, Akhai Capital Management

delivered the talk. The program attracted a

large audience and was well received and

appreciated.

iv. During the quarter, Mr. Heinz Willems and Ms.

Aisha Khan, Senior Consultants of European

Union on Microfinance visited IBP to ascertain

Institute's capabilities to operate as a support

and examination body for the microfinance

certification program.

4. RECRUITMENT & SELECTION

PROCESS

A growing number of banks and DFI's are

outsourcing their recruitment and selection

assignments to IBP for accuracy, impartiality and

swiftness of results. Owing to this trust, IBP is now

an active partner in the recruitment and selection

of over 16 banks and other financial institutions.

During the quarter under review, recruitment tests

were conducted for the following banks:



No. of Total

S. No. Banks Centers Enrolled

1 State Bank of Pakistan - IT Professionals (5 tests) 6 2803

2 United Bank Ltd. - Management Trainees 7 2355

3 Allied Bank Ltd. - Management Trainees 7 2499

1. Laws Relating to Financial Services Suggested by IBP Council and designed by the

IBP Academic Board as a subject for ISQ course

in Stage I, the underlying objective of the book is

to provide functional knowledge and

understanding of the prevalent laws, traditions

and practices in the financial sector. It acquaints

the readers with the legal and regulatory

framework of banking and non-banking financial

institutions, so vital for professional bankers to

avoid serious penalties and punitive action against

their banks. The operational legal framework has

been revisited to bring it up-to-date as also to

make it applied and focused. This book has been

written by Mr. Gul Nawaz Khan, former SEVP,

National Bank of Pakistan, and reviewed by Dr.

Asrar H. Siddiqui, Executive In-charge, Bank Al-

Habib Ltd.

2. Management Accounting for This is one of the subjects prescribed for ISQ

Financial Services examination. The objective of the book is to apply

traditional Management Accounting techniques

pointedly towards financial services sector. The

book is a worthy intellectual effort of Mr. Aman U.

Saiyed, a reputed Certified Public Accountant

with vast international exposure and experience.

3. ISQ Examination Papers This publication is a collection of Question Papers

– Summer 2006 set in ISQ Examinations held in May, 2006.

Beginning July 2006, IBP will conduct Recruitment Tests for the following institutions:

No. of Total

S. No. Banks Centers Enrolled

1 State Bank of Pakistan - Statistical Officers 4 148

2 MCB Bank Ltd. - Trainees Officer 6 3200

3 State Bank of Pakistan - SBOT 12 5 800

4 Bank Al Islami - -

5 Dawood Islamic Bank Limited -



5. IBP SUPERIOR QUALIFICATION

The first examination under IBP Superior

Qualification was held from May 8, 2006 to May

13, 2006 at 23 centers simultaneously including

Abu Dhabi. Total 2351 participants were enrolled,

while the result was announced on June 16, 2006

in a record time of 33 days. As before, preparatory

evening classes for ISQ Examinations (Winter)

2006 shall be offered at all our major centers from

July 17, 2006.

6. RESEARCH & PUBLICATIONS

Besides its quarterly Journal and fortnightly

Economic Letter, IBP published the following

books during the quarter under report:



EVENTS AT LOCAL CENTRE

S. No. Courses Title Resource Persons

Lahore.

1. SBP Guidelines on Risk Management Mr. Jameel Ahmad

2. Analysis of Financial Statements for

Lending Decisions Mr. Nizamuddin, FCA

Rawalpindi

1. SBP Guidelines on Risk Management Mr. Jameel Ahmad

2. Cash Management Mr. Taslim Kazi

3. Analysis of Financial Statements Dr. Baber Zaheer Butt

Islamabad

1. Marketing of Banking Products & Services Mr. Tariq Ansari

2. Problem Solving and Decision Making Mr. Imran Qamar

3. Effective Checks on Money Laundering Mr. Malik Dilawar

Multan

1. Branch Banking Operations: Law and Practice Mr. Arshad Latif

Quetta

1. Islamic Banking Mr. Abdul Aleem

Hyderabad

1. Know Your Customer & Anti-Money Laundering Mr. S.M.I.Rizwe

2. Banker - Customer Relationship Mr. S.M.I.Rizwe

7. IBP WEBSITE

IBP website with up-to-date information on

various aspects of traditional banking, economics,

Islamic banking, Basel II, UCP-500 and other

knowledge endeavors surpassed all time high

record of over 1.2 million hits during June 2006.

Out of this, 20,000 hits each were received from

the U.S. and Germany alone. Other countries from

where regular hits are received include Canada,

U.K., Saudi Arabia, France, Ireland, Singapore,

Egypt, Switzerland, Italy, Jordan, Netherlands, Sri

Lanka, Norway, Thailand, Belgium, Russian

Federation, Japan, Sweden, Denmark, Australia

and India.

IBP website has been given a new look.

Effective July 1, 2006, IBP website is more

impressive and purpose-built carrying a dynamic

knowledge portal with current information on

banking and finance including SBP circulars and

guidelines, IBP seminars, etc. The information

about jobs available in banking, finance and

related fields will continue to be updated on daily

basis. We invite our worthy stakeholders to visit

our website and favour with the valuable

suggestions.

8. EVENTS AT LOCAL CENTRES

The Institute has 11 Local Centres in different

parts of the country. They also hold courses on

topical subjects. During April - June 2006,

following programs were held by the Local

Centres:

IBP as a knowledge institute is continuously

pursuing the ways and means to serve its

stakeholders in the best possible manner. New

products and services are being discussed with our

visiting scholars to achieve new milestones.



MOBILE COURSES

Mirpur A.K.

1. Know Your Customer & Anti-Money Laundering Mr. Muhammad Junaid Younus Ghori


ISQ – The Fast Rising Star

By the grace of Allah Almighty, there has been

an overwhelming response to the IBP Superior

Qualification (ISQ) which was formally launched in

January, 2006. The enrolment for the program is

highly encouraging. Most of the participants were

either MBAs, MAs and M.Coms, or CAs, ICMAs, &

MBBS. Thus ISQ has been rightly perceived as a

professional qualification equal to or slightly over

the Master degree. We are confident this would be

a milestone in the IBP knowledge endeavors.

Since its launching IBP Superior Qualification

(ISQ) received greater acceptability among the

professionals equally from banks, financial

institutions and corporates. The well-designed

curriculum received wide appreciation as a truly

value based knowledge endeavour.

First ISQ examination was conducted at 23

centres including Abu Dhabi. Over 2300

candidates were listed in fifteen subjects of Junior

Associateship of IBP (JAIBP) and the aggregate

pass percentage was 16%. Sixty professionals

passed all the requisite subjects of JAIBP and are

eligible to join the prestigious group of

professionally qualified bankers.

IBP Superior Qualification Examination Summer-2006

Bank-wise Position of Successful Candidates

MCB Bank Limited

S.No. Name S.No. Name

1. Mr. Shahid Jabbar 2. Mr. Imtiaz Ahmad

3. Mr. Zeeshan Ashiq 4. Mr. Muhammad Dilshan Hussain Qadri

5. Mr. Syed Asad Ehtisham 6. Mr. Faran Qaisar Hashwani

7. Mr. Zia Muhammad 8. Mr. Saulat Alamgir

9. Mr. Waseem Munawar 10. Mr. Khalid Mansoor

11. Mr. Abid Nazir 12. Mr. Azhar Iqbal Naveed

13. Mr. Arfan Yousaf

State Bank of Pakistan


14 Mr. Nasreen Akhtar 15. Mr. Sajid Mukhtar

16. Ms. Shahla Riaz 17. Mr. Muhammad Khalid

18. Ms. Sadia Irshad 19. Ms. Najma Azmat

20. Ms. Dur-e-Shahana Khan 21. Ms. Ghulam Khadija

22. Mr. Noorullah 23. Ms. Sumreen Kanwal

24. Mr. Abdul Haseeb Sheikh

National Bank of Pakistan


25. Mr. Abdul Wajid 26. Mr. Sarfraz Ahmad

27. Ms. Erum Sirajuddin 28. Mr. Azim Khan

29. Mr. Muhammad Masab Faridi 30. Mr. Faisal Mirza




Askari Commercial Bank Ltd. Bank Alfalah Limited


31. Ms. Sonia Farooq 34. Mr. Usman Saeed

32. Mr. Fiaz Ahmad 35. Mr. Muhammad Iqbal

33. Mr. Mohammed Ali Ishaque 36. Mr. Muhammad Qamar Mufti

The Bank of Punjab Other Professionals


37. Ms. Saima Shazia 40. Mr. Muhammad Tariq

38. Mr. Syed Asif Ali 41. Mr. Amjad Ali

39. Mr. Attiqur Rehman 42. Mr. Zafar Iqbal

Saudi Pak Commercial Bank Ltd. Habib Bank AG Zurich


43. Mr. Muhammad Shahzad Ahmed 45. Mr. Aamir Patel

44. Mr. Muhammad Ahsan 46. Mr. Mazahir A. Thawerani

SME Bank Limited


47. Ms. Lyla Khan 48. Mr. Shazaib Khan Kasi

United Bank Limited Allied Bank Limited


49. Mr. Muhammad Iqbal Mir 50. Mr. Siddique Pervez

Albaraka Islamic Bank B.S.C. (E.C.) Bank Al-Habib Limited


51. Ms. Madiha Rubab 52. Mr. Kamran Siddique

Citibank N.A. NIB Bank Limited


53. Mr. Khurram Zaheer Chishti 54. Mr. Muhammad Usman Baig

PICIC Commercial Bank Limited Prime Commercial Bank Limited


55. Mr. Tariq Yar Khan 56. Mr. Nusrat Hayat Ranja

Saudi Pak Industrial & Agri. Invest. Co.Ltd. SECP


57. Mr. Mahmood Alam Sher 58. Mr. Muhammad Atif Hameed

Standard Chartered Bank Silver Star Insurance Co. Ltd.


59. Mr. Muhammad Zaryab Qureshi 60 Mr. Syed Ali Wajid Kazmi

As the number of queries is rising

continuously, it has been decided to develop a

guideline to address their frequently asked

questions.

1. What is ISQ: It is a continuous route to

professional development in Banking and Finance.

The qualification provides dynamic targets to the

enthusiastic and challenge loving individuals.

* Tier one is Junior Associateship of IBP (JAIBP)

12 subjects and three stages.

* Tier two is Associateship (AIBP) 5 subjects,

experience and continuous training.

* Tier three is Fellowship (FIBP) 2 subjects,

dissertation, viva-voce and published articles.

* Full details of ISQ are available on IBP website

(www.ibp.org.pk).

2. What is Junior Associateship of IBP

(JAIBP): The former Banking Diploma (DAIBP)

has been transformed into a high value

qualification with a new nomenclature of Junior

Associateship of IBP (JAIBP). This is an effort to

translate the stakeholders' expectations into an

effective, valuable and need focused professional

qualification.

JAIBP Format

Stage-I

1) Business Communication for Financial

Services

2) Laws Relating to Financial Services

3) Accounting for Financial Services

4) Macro Economics and Financial System of

Pakistan

Stage-II

1) Information Technology in Financial Services

2) Lending Operations and Risk Management

3) Human Resource Management - Basic

Practices



Qualification-Wise Overall Enrolled, Appeared, Passed & Pass Percentage

Sl. No. Qualification Enrolled Appeared Passed %age

1. M.B.A. 874 733 165 22.5

2. C.A./ACMA 40 32 12 37.5

3. M.Com. 207 174 43 24.7

4. Masters 438 351 33 9.4

5. B.E./MBBS 9 5 2 40.0

6. Bachelors 809 658 51 7.8

Candidates who Secured Distinction

S.No. Name Organization Subject

1. Mr. Owais Shahid Allied Bank Limited Accounting for Financial Services

2. Mr. Muhammad Saqib Bank Alfalah Limited Marketing of Financial Services

3. Mr. Abdur Rehman Bank Alfalah Limited Marketing of Financial Services

4. Mr. Javed Ahmad MCB Bank Limited Marketing of Financial Services

5. Ms. Amina Imran National Bank of Pakistan Marketing of Financial Services

6. Mr. Muhammad Jamil The Bank of Khyber Islamic Banking & Finance

7. Mr. Kashif Adeel Other Professionals Islamic Banking & Finance

8. Mr. Nizar Diamond Ali Other Professionals Business Communication for FS

4) Marketing of Financial Services

Stage-III

1) Monetary Economics

2) International Trade Finance & Forex

Operations

3) Management Accounting for Financial

Services

Specialization Subjects (any one subject

to be selected)

1) Leasing and Micro Finance

2) SMEs and Agricultural Finance

3) Islamic Banking and Finance

4) Retail and Consumer Banking Operations

3. Who is eligible: This high value qualification

is open to all professionals whether working in

a financial institution or not and even coming

directly from colleges, universities. Prospective

participants must be Graduates (BA, B.com,

B.Sc, BBA or equivalent) with minimum

second class (45%).

4. Entry Process: They can enter into the

process by depositing the Relationship form,

along with copies of testimonials and requisite

fee. The forms are available at all IBP offices as

also at IBP website (www.ibp.org.pk) under

the title IBP Superior Qualification (ISQ).

5. Fee Structure

· Commuted Life time Relationship &

Processing Fee Rs. 5,500/-

· Examination Fee per subject Rs. 500/-

Fee Structure (For Overseas examinees):

* Commuted Life time Relationship &

Processing Fee US$ 190/-

* Examination Fee per subject US$ 20/-

6. Building Block Approach:

i) Those who appear in the ISQ Examination for

the first time should start their knowledge

journey through Stage-I.

ii) They will be allowed to appear in the Stage-II

examination only after passing at least two

papers of Stage-I. They should appear for

examinations for the remaining subjects of

Stage-I alongwith subjects in Stage-II.

iii) They will not be allowed to appear in the

examination of Stage-III unless they have

passed all the subjects of Stage-I and at least

two subjects of Stage-II.

7. Exemption Policy: As IBP curriculum is

unique, focused towards financial services

sector and dedicated towards applied aspects

of banking and finance the IBP council headed

by Governor, State Bank of Pakistan has

decided not to allow exemption in any subject

on the basis of university or other professional

qualifications.

8. Awards and rewards: A scheme of

incentives, rewards and recognition for all the

three tiers of ISQ has been worked out. This

included award of Gold Medals, Cash prizes

and other incentives. Banks are giving cash

awards, weightage in promotion and annual

performance appraisal and new recruitment.

9. Books, Study Guide and relevant

literature: IBP has already initiated the

process of bringing out books and other

literature authored by highly qualified and

experienced bankers, academicians,

consultants and experts. This high quality work

will require at least four months time.

Following books have been released and are

available at IBP offices.

1) Business Communication for Financial

Services

2) Laws Relating to Financial Services

3) Accounting for Financial Services

4) Economics

5) Managing Risk in Financial Sector

6) Marketing of Finance Services

7) Managing of Lease Operations

8) Challenge for Banking Sectors of Pakistan is

21st Century

9) Bank Lending

10) Coaching classes, Mentorship: We aim at

organizing coaching classes at all IBP centers.



However this is a demand driven activity.

Interested examinees are required to convey

their interest to our offices, local centers and

coordinating offices. The Coaching classes

would be of three months duration starting

from July 17, 2006. At places where such

classes are not held we shall try to develop a

group of Mentors for necessary guidance,

support and facilitation.

- Coaching Classes Fee

Rs 2,000/- (per subject) for a three month period

11. Existing Examinees: Those who have

qualified under the DAIBP format or are in the

process of completing their qualification (under

Stage-I, II & III format) will not lose any credits.

They are being treated at par with those in the

new format. Hence the revised plan has not

created any problem for the existing

participants of the program.

12. Mid stream examinees: The examinees

under existing DAIBP format (Stage I, II, and

III) will receive full credit under new format for

the subjects passed and valid.

13. DAIBP under old format of Part I - II: All

such Diploma holders are eligible to participate

in the process leading to Associateship of IBP

(AIBP). However as a first step and in line with

the existing IBP rules, they have to appear and

pass following five subjects and acquire Special

Certificate. This will equate them with the

DAIBP under stage I, II and III format. They

will then be able to prepare for Associateship

examination. These five subjects are:

i) Information Technology in Financial Services

ii) Lending Operations and Management

iii) Human Resource Management - Basic

Practices

iv) Marketing of Financial Services

v) Management Accounting for Financial

Services

14. IBP Superior Qualification (ISQ) -

Incentive Package: IBP Council endorsed

following incentive package for ISQ:

a) Reimbursement of Fee

i) The banks and financial institutions should

encourage their executives, officers and staff to

enter into knowledge process and join ISQ.

They should reimburse to the concerned staff

one time entry plus life-time subscription fee

aggregating Rs 5,500/- upon successful

completion of the Stage-I of Junior

Associateship of IBP (JAIBP).

ii) Reimbursement of coaching classes fee of

Rs 2,000/- per subject against IBP confirmation

that he/she has attended 75% or more

sessions.



Subject under Stage I, II, III Equivalency with ISQ subject

Economics Macro Economics & Financial System of Pakistan

Business Communication Business Communication for Financial Services

Information Technology in Banks Information Technology in Financial Services

Agricultural & Small Business Finance SMEs and Agricultural Finance

AccountingAccounting for Financial Services

Banking Law and Practice Laws Relating to Financial Services

Human Resource Management & Development Human Resource Management - Basic Practices

Marketing of Financial Services Marketing of Financial Services

Financial Management Management Accounting for Financial Services

International Trade Finance & Foreign Exchange International Trade Finance & Forex Operations

Credit Management Lending Operations and Risk Management

Monetary Economics Monetary Economics

iii) Reimbursement of examination fee of Rs 500/-

per subject upon passing of each subject.

b) Cash Awards

The existing cash award available for DAIBP

shall be extended to JAIBP

Stage-I Stage-II Stage-III

1st Attempt Rs 50,000/- Rs 75,000/- Rs 100,000/-

2nd Attempt Rs 30,000/- Rs 50,000/- Rs 75,000/-

3rd Attempt Rs 10,000/- Rs 15,000/- Rs 25,000/-

c) Weightage in Performance Management

System

JAIBP is a post graduation qualification and by

far more rigorous than other Master degree

qualifications. Hence its weightage in the

performance management system/annual

confidential report should be at least equal to

the Master level qualification, if not higher.

15. What is Associateship of IBP (AIBP): The

Associateship of IBP (AIBP) will be awarded to

those who:

a) Have completed the examination process and

have qualified for DAIBP (Stage-I, II & III) or

DAIBP {Part-I & II} plus Special Certificate or

JAIBP.

b) Have acquired minimum 3 years experience in

the financial services sector after completing

DAIBP/JAIBP. Those who have cleared

DAIBP on or before winter 2003 are eligible

for winter 2006 examination.

c) Have a record of Continual Professional

Development (CPD) during last 3 years

through receiving or imparting training or

other knowledge related activities. A minimum

of 20 hours CPD per year is mandatory.

d) Have completed 5 additional courses as

mentioned below:

Core subjects:

3101 Anti Money Laundering Measures and

Business Ethics

3102 Corporate and Banking Law

3103 Advance Risk Management

3104 Financial Planning and Budgeting

Specialization subjects (any one subject

to be selected):

3151 Financial Derivatives

3152 Project Financing

3153 Capital Markets

3154 Strategic Human Resource Management

3155 An Introduction to Insurance

Those who pass the five subjects and meet all

the above mentioned requirements will be

awarded Associateship by the Council of the

Institute.

16. What is Fellowship of the Institute: The

third tier of coveted ISQ is Fellowship of IBP

(FIBP). Fellowship of the Institute of Bankers

Pakistan will be awarded by the Council to

those who complete the following

requirements:

a) They must have earned Associateship of IBP

through ISQ.

b) They should possess minimum 5 years

experience after receiving or imparting

Associateship with year-to-year Continual

Professional Development through training.

c) They should have passed the following two

core subjects and submit Dissertation on a

topic/subject to be approved by the IBP

Academic Board:

Core Subjects

1. Strategic Management in Financial Institutions

2. Risk Management Systems and Operations

3. Dissertation on a topic/subject to be approved

by the Council.

4. Defend their Dissertation through Viva Voce.

5. They are also required to have at least 2

articles published in the prestigious local or

international journals.

ISQ is a prestigious qualification demanding

extra ordinary effort, dedication and commitment

on the part of participants. However, this will give

you confidence, sense of pride and inner

satisfaction. Wish you all the best.




Knowledge Power House:Touching New Heights

IBP website (www.ibp.org.pk) after touching

record visitors of over 1.2 million during June,

2006 is now wearing a new look - A knowledge

power house. A place where you find most of the

critical information on banking and finance under

a truly dynamic environment. Beginning year

2004 a process was initiated to convert the IBP

website into a useful knowledge source for its

worthy stakeholders. With a humble beginning of

two to three thousand hits per day, it gradually

received the attention from knowledge seekers

both local and international and attained the status

of a sought after website. An average of 41,000

hits per day with an aggregate of 1.2 million hits

during June, 2006 amply support this contention.

IBP website is receiving hits from sixty countries

mainly from U.S. Commercials, Germany,

England, Canada, Saudi Arabia, Australia, all EU

countries, UAE, Malaysia, India and others.

Concurrent information, rich literature, valuable

information and vibrant job openings resulted in

continuous increase in the interest both from local

and international visitors. While celebrating this

unprecedented success, we should acknowledge

the role of silent soldier, the unsung heroes. In the

back office, a dedicated team of IBP officers and

staff ensured that IBP website should be able to

serve as a dynamic knowledge portal. Mr. Agha

Awais Ali is the dedicated professional, who took

this website as a mission. Awais worked

continuously to keep this website a source of

information on continuous basis. Mr. Qadir Bux

ensured that photo gallery is updated, results of

examinations and tests are released on time. When

it comes to the complete reviewing and upgrading

of the website, commenced three months ago, a

highly committed and motivated officer Mr. M.

Azeem Khan took upon himself the gigantic task

and brought the new knowledge portal with the

technical support extended by Mr. Aamir Ansari

and other members of M/s. Soft Horizon. This list

would be incomplete without the mentioning of

Mr. Aamir Ishaq and Mr. Muhammad Arif Mala

who provided admirable support on regular basis

to complete this project with quality and

adherence to time frame.

What is new? We should say almost every

thing. One of the over riding objectives of

revamping was to increase the convenience and

accessibility of our worthy visitors by reducing the

use of flash, graphics, images and unfriendly fonts.

The new website has extensive knowledge treasure

but less cosmetics. On your first visit to the Home

Page you may get the impression that it is heavily

loaded and over crowded. It is deliberate. We

believe that our visitor is time pressed and does not

have the luxury of flipping between the pages to

locate the relevant information. The Home Page

now operates as a knowledge menu with eight

dedicated areas and over hundred sub items. You

will get a whole picture on one page and then

choose to move in to a certain knowledge area for

dynamic information and links. Lets take a quick

journey of the knowledge power house:

Area-1: Top line has six icons other than

date and home

1.1 High Achievers: List of Gold Medalists and

Prize Winners of IBP examination and

competition.

1.2 Picture Gallery: A pictorial presentation of

IBP endeavors, events and programs.

1.3 Opportunities: Job openings, local and

international, updated on daily basis.

1.4 Useful links: Web directory of domestic and

international financial institutions.

1.5 Site-Map: A compendium of all knowledge

icons and sub icons.

1.6 Contact us: A ready to contact mechanism

with ease and speed.


Below this area is a moving strip “News

and Events”

Area-2: Left hand side has eighteen

knowledge boxes

2.1 IBP Profile: Brief introduction of IBP

under seven sub titles.

2.2 IBP Family: Who is who at IBP Head

Office and local centres.

2.3 Knowledge Spectrum: Brief coverage of

five IBP activities/endeavors.

2.4 IBP Superior Qualification: Format,

Syllabus, Rules, Past Papers and many more.

2.5 Training & Development: Description of

seven training initiatives.

2.6 Recruitment & Promotion: A to Z of the

service and accomplishments.

2.7 Research and Publication: List of

publications and concurrent additions.

2.8 MBA Banking: IBP integration with the

Universities for high quality services.

2.9 Research Paper Competition: New

competition, rules, forms and past results.

2.10 Treasure: SBP Governor's speeches,

Articles, Research Studies and other.

2.11 Library: Rules, forms and current

additions/new arrivals.

2.12 Advisory and Consultancy: Another

facility and support for IBP knowledge

partners.

2.13 International endeavors: Description of

IBP linkage with international organization.

2.14 Scholarships: Particulars of the scheme,

rules and the list of scholars.

2.15 IBP Annual Report: Report submitted to

Annual General Meeting, 2005.

2.16 Career in Banking & Finance: Job

openings in the Banking Sector.

2.17 ISQ and Recruitment Test Results: List

of successful candidates.

2.18 EMB: Effective Branch Management, a high

value certificate program.

2.19 Customized Training Courses: IBP

serving the banks through need based

courses.

Area-3 : The title "Current" signifying

latest information under five categories

3.1 SBP & SECP Circulars: Latest circulars

issued by the two regulators will be

provided.

3.2 SBP & SECP Guidelines: Guidelines

issued by the two regulators.

3.3 News and Events: Fast happenings in the

economy and also at IBP.

3.4 IBP - This Month: Systematic record of

events, progress and tasks.

3.5 Financial Statements of Banks:

Financial statements for the year 2005 of

different banks.

Area-4 : The title "Updates" signifying

current status under five categories.

4.1 Economic: Ten items giving uptodate

status of economy assessed by SBP.

4.2 Banking: Ten items covering critical

banking data and assessment by SBP.

4.3 Basel-II: Nine items describing BIS, core

principles, and Basel-II standard.

4.4 Islamic Banking: Seven documents

including ten years market plan and

Glossary.

4.5 Economic Letter: The current weekly plus

all issues since December, 2004.

Area-5 : Scrolling news, events,

programs and many more. Every

important document released by SBP

will be initially on this scroll.

Area-6 : IBP Directory : Ten items

encompassing all the IBP linkages.

6.1 Council: The high powered Board of

Governors.

6.2 Committees & Boards: Six consultative

and advisory forums.



6.3 Institutional members: Fifty member

banks and financial institutions.

6.4 Stakeholders: 152 banks, financial

institutions, corporate and others.

6.5 Fellows: 354 Honorary Fellows recognized

for achievements.

6.6 Associates: 607 Honorary Associates

recognized for valuable services.

6.7 Domestic Network: Eleven local centres

and fifteen coordinating offices.

6.8 Overseas Network: Twenty Overseas

Coordinators.

6.9 IBP Team: Head Office and Local Centres

Teams serving stakeholders.

6.10 Location and Contact: Location, IBP

building, facilities and contact.

Area-7 - Eight icons providing direct

access to important websites.

7.1 Economic Survey 2005-06 issued by

Ministry of Finance.

7.2 Federal Budget 2006-07 from official site

of CBR.

7.3 Draft Banking Act 2006 to replace BCO, 1962.

7.4 Foreign Exchange Rates direct through SBP

website.

7.5 KIBOR: Karachi Inter Bank Offering Rates

from SBP website.

7.6 UCP-600: A new document in making to

replace UCP-500.

7.7 Basel-II: The regime bound to takeover

banks everywehere.

7.8 Karachi Stock Exchange: Live trading

directly through KSE website.

Area-8 - Eight IBP publications and a

new version of Adobe Reader. For each

publication table of contents, price and

order form.

We strongly recommend you to start your

official day by clicking to (www.ibp.org.pk). From

this site, you are connected to some of the most

important local and international website and that

too on a dynamic pattern. IBP is aiming to make

this website a true power house of knowledge and

Insha-Allah we will succeed.



IBP – Strategic Partner inRecruitment andPromotion Process

The Institute of Bankers Pakistan (IBP), since

its inception in 1951, is serving the financial

services sector through various innovative

knowledge products and services mainly in the

field of human resource management and

development. The services include recruitment

and selection of human resource for the financial

sector. Based on client's needs, the Institute holds

country-wide written tests, group discussions and

interviews thus facilitating selection of best

executives and officers on strictly merit basis.

Initially this service was rendered for State Bank of

Pakistan. It has since been extended to major

commercial banks and financial institutions.

During calendar year 2005, thirteen institutions

availed these services through which over 31,000

participants were listed for recruitment and

promotion tests and over a 1,000 were inducted in

the banks and financial services sector. This is a

rigorous process aiming at giving fair chance to the

talented youth and to supply the best talent to the

industry. IBP's comprehensive package has

following key components:

a) Drafting, designing and processing the job

vacancy advertisement alongwith information

form in the national press as also its release on

IBP website (www.ibp.org.pk)

b) Receiving, organizing and processing CVs and

job applications and responding to queries.

Short-listing of candidates based on bank

approved criteria.

c) Developing database for the release of admit

cards. Determining centres, developing sample

test with weightage and getting clients

approval.

d) Appointing centre superintendents,

invigilators, checkers and arranging printing of

admit cards, dispatching through courier or

registered mail.

e) Releasing list of eligible candidates on the

website and then attending to requests for

change of centre, if any, non-receipt of admit

card and other queries.

f) Printing of test papers and their despatch to

test centres such as Lahore, Rawalpindi,

Peshawar, Quetta, Multan, Sukkur and others.

g) Normally such test paper carries three parts (i)

English writing and comprehension (ii) Maths,

logical inference, (iii) General knowledge and

knowledge about banking.

h) Weightage of each part varies between 30 to

40%. Part-II & III are solved on a computer

sheet and is graded through Optical Character

Recognition (OCR).

i) Depending on clients needs, computer literacy

tests are also conducted and their results are

compiled and supplied to banks separately.

j) Depending on banks needs these tests are

conducted simultaneously at 8 to 10 centres

within the country and 4 to 5 outside the

country.

k) Extensive arrangements are made at all centers

as to Air-conditioned hall (wherever possible),

reception / problem solving, supervision and

control.

l) Tests are conducted and effectively supervised

by the superintendents, deputy

superintendents, invigilators, support staff and

surprise check by the client.

m) Candidate’s identity is checked and verified

through the admit card, CNIC and

identification slips sent by IBP. Extra care is

exercised at all centres.

n) Upon completion of test, the copies are



collected, counted, verified with attendance

record, packed and sent to IBP head office on

immediate basis.

o) Upon receiving copies, codification and

separation of name identity slip from the copy

is carried out before sending the same to the

checkers and others.

p) Results when received are tabulated, counter

checked, consolidated and computerized. After

the decoding process, the merit lists are

provided to the banks.

q) The banks use their discretion and decide the

benchmark for further short-listing of the

candidates. This information is then released

on IBP website.

r) The group discussion process is aimed at

judging the quality of leadership, team work,

communications, judging and assessing the

gist of topics.

s) IBP prepares topics and keeps them in

separate sealed envelopes. A group of 8 to 10

participants is invited to attend the session.

t) Depending on the city-wise distribution of

short-listed candidates this exercise is

conducted at Karachi, Lahore, Rawalpindi and

Peshawar.

u) A three-member panel, two from the recruiting

bank and one IBP expert, observes and

evaluates each group and develops final

grading plan.

v) The call letters for group discussion are issued

by IBP and all related queries and preparation

are handled accordingly.




The Impact of Non-Interest Income onDiversification, FinancialPerformance andRiskiness at CommercialBanks in Pakistan

ABDUL REHMAN1

Officer Grade IAllied Bank Limited

Abstract

This study explores the relationship between

non-interest income, diversification and financial

performance at commercial banks in Pakistan over

the period 2000-2004. Using data on 30 Pakistani

commercial banks, we find that non-interest

income is a more volatile source of income than

the net-interest income. However, as opposed to

most US studies, we find no evidence that non-

interest income either increases the volatility of

return on equity (ROE) as measured by the

standard deviation of ROE or reduces the risk

adjusted performance of banks as measured by the

Sharpe ratio. In terms of insolvency risk as

measured by Z-score, non-interest income appears

to be associated with higher probability of

insolvency risk in banks. This is more prominent in

the case of large and small banks. We find mixed

evidence in terms of diversification. More

concentrated (less diversified) banks have higher

volatile earnings and greater insolvency risk but at

the same time have better risk adjusted

performance.

Keywords: Commercial banks, diversification,

non-interest income, Pakistan

1. Introduction

The banking system in Pakistan has undergone

significant changes over the past 15 years. While it

was predominantly under the control of Public

Sector Commercial Banks in 1990, the Pakistani

banking system is now dominated by the Private

Commercial Banks. During this period there has

been a significant change in the asset and liability

mix of commercial banks. Traditional banking

activities (lending and deposit taking) which had

been the core of all banking business in Pakistan

were gradually complemented by non-traditional

fee and commission generating activities. Though

in recent years, there has been a reversal in the

trend and interest based lending business is again

becoming the major income generating activity,

non-traditional banking activities still generate

37.5% of the total gross income of the banking

system.

Non-traditional activities and the associated

non-interest income are on the rise in commercial

banking around the world. The trend is very

prominent in the US commercial banking system

where non-interest income as a percentage of

aggregate banking industry assets has increased

from 20.31% to 42.20% between 1980 and

2001(DeYoung and Rice 2004 c). The shift was

linked to the diversification benefits and the idea

was accelerated by the technological

advancements and regulatory reforms. If non-

traditional activities diversify banks' revenue

stream, then the theory of diversification implies

that the profitability of banks should be more

stable, less volatile and that non-interest income

and net-interest income should be uncorrelated.

This study is the first of its kind to investigate

the above hypothesis in relation to the financial

performance of commercial banks in Pakistan. We

empirically examine how bank characteristics,

market conditions, technological innovations and

macro economic environment affect the level of

non-interest income in commercial banks. In terms

of risk elements, our study examines whether or

not non-interest income increases the volatility of

earnings of commercial banks. Volatility of

earnings is measured by the standard deviation of

return on equity (ROE). The study also takes into

account the effect of non-interest income on


1. Presently posted at NAB Balochistan.

commercial banks' risk adjusted performance as

measured by the Sharpe ratio and solvency as

measured by Z-score. The coefficients are

estimated with the help of cross sectional

generalised least square (GLS) linear regression

model with random effects.

2. The strategic drivers and sources of

non-interest income

DeYoung and Rice (2004b) commenting on

the strategic diversity of banking firms report that

"two generic banking strategies: a traditional

banking strategy and a non-traditional banking

strategy, have emerged from the fog of

deregulation and technological change" (p.53).

They argue that in the traditional banking

strategy, banks believe in close person to person

contacts with their customers, extend loans and

other credit facilities to those customers who

develop long standing relationships with the

banks. Customers of such system are

informationally opaque and are unable to raise

funds in the financial markets. Banks in such a

system generate higher income despite having

high per unit cost because they charge high interest

rate on lending and pay low rate on deposits of

customers.

In the second of the two generic strategies,

banks achieve a relatively low per unit cost due to

economies of scale in their production process,

marketing, securitisation, credit cards and

residential mortgages. However, the presence of a

very competitive market does not allow banks to

charge high interest rates on lending and their

income level remains very low. In order to be

profitable and less vulnerable to economic shocks,

banks of this model need to diversify their business

activities into non-traditional banking activities.

It was the conventional thinking of risk

reducing effects of diversification that encouraged

banks to shift to non-traditional banking activities

during 1980s and 1990s as argued by DeYoung

and Rice (2004a). It was generally believed that

shifting into non-traditional activities would reduce

the credit and interest rate risk exposure of banks,

and thereby reduce the variability in banks'

earnings through diversification. The recent

empirical studies have now proved that such

beliefs were actually superficial and indicate that

the increase in non-interest income is not in

isolation with changes in other interrelated factors

such as income from lending, fixed and variable

inputs and financing structure. All these factors are

considered to have direct effect on the volatility of

bank earnings and exposure to risk.

3. Non-interest income at commercial

banks in Pakistan

Non-interest income plays an important role in

the overall profitability of the banking system in

Pakistan. It now accounts for 37.5% (Dec 2004) of

the total gross income at commercial banks in

Pakistan. Non-interest income accounted for

nearly 54% of the gross income of commercial

banks in 1997, the start of our sample period. A

large part (63.8%) of this income came from "other

non-interest income" which mainly consisted gain

on sale of securities held by the commercial banks.

Fee income and dealing in foreign currency

contributed the remaining 36.2%. Figure 1 shows

how the share of non-interest income as percent of

gross income and total assets has decreased since

1997 with the corresponding increase in the share

of net-interest income (Banking System Review

2004).

The level of non-interest income at commercial

banks in Pakistan is close to those of U.S banking

industry (40%) and EU countries (41%) as

reported by DeYoung and Rice (2004c) and Smith

et al. (2003) respectively.

Commercial banks generate much of their

non-interest income from fee-based activities,

dealing in foreign currency, trading in investment

securities, dividend from equity investments and

other non-income generating activities. As of

December 2004, fee-based income alone

accounted for 16.8% of the commercial banks'

gross income and recorded a substantial growth of

42.6% over fee based income in 2003. Similarly,

income from dealing in foreign currency and

foreign exchange related trade business activities



also showed a significant increase of 33.1% over

2003 and individually accounted for 5.4 % of the

gross income (Banking System Review 2004).

4. Non-interest income and financial

performance, the relevant literature

A large number of studies over the past two

decades have tried to find out the link between the

rising share of non-interest income and its effects

on bank's performance in a changing economic

environment (deregulation, technological

innovations, and product and business

diversification). The results of these studies provide

mixed explanation to the hypotheses of non-

interest income. Not all of these studies can be

explained here. However, some of the important

and relevant studies which are more recent ones

and directly examine the relationship of non-

interest income with banks' performance measures

and earnings streams are given in the following

lines.

Rogers and Sinkey (1999) using data on the

U.S. commercial banks over the period from 1989

to 1993 and taking non-interest income as

dependent variable, estimate the coefficients on

asset size (square of total assets), profitability (net

interest margin NIM), core deposits (core deposits

plus deposit insurance premia to total assets), and

risk measures (equity capital to total assets, liquid

assets to total assets, interest rate risk and credit

risk). The estimates of their results show a positive

and significant non-linear relationship between

asset size and non-interest income suggesting that

large banks are more involved in the non-

traditional activities.

Smith et al. (2003) examines the trends and

the associated risk indicators in a European

perspective. They analyse the mean return and

coefficient of variation (a measure of variability) of

non-interest income and net interest income in

2655 European banks from 15 EU countries over

the period 1994-1998. They suggest that the level

of net interest income has declined with the

corresponding increase in the ratio of non-interest

income to total assets. They also report less

volatility in non-interest income for Europe as

compared with the United States.

De Young and Rice (2004c) taking a

comprehensive approach to the incidence of non-

interest income not only investigate the link

between financial performance and non-interest

income but also examine the association between

bank characteristics, market conditions, and

technological developments and increased non-

interest income. Using data on 4712 U.S.

commercial banks from 1989 to 2001 to they find

a significant positive relationship between bank

characteristics and non-interest income. They also

find a positive coefficient on assets size indicating

that large bank pursue more non-traditional

activities. The investigation of performance related

measures (ROE, Standard deviation of ROE, and



Figure 1: Non-interest income and net-interest Income as percentage of gross Income and Total Assets

Source: State Bank of Pakistan

Sharpe ratio) suggest that shift towards non-

traditional activities is worsening the risk-return

trade off for the US commercial banks.

5. Data and methodology

5.1 Sources of data

This study uses balanced panel data from the

balance sheets and income statements of 302

commercial Pakistani banks ( divided into three

sub groups)3 obtained from the London-based

International Bank Credit Analysis Limited's

'Bankscope' database, annual reports of

concerned banks, various banking related

statistical bulletins and reports of the State Bank of

Pakistan (SBP) available on its website. The

empirical analysis is based on the period 2000-

2004 (4 years trailing average from 1997-2004).

Appendix 1 displays the summary statistics for the

variables.

5.2 Methodology

This study examines three important

relationships between the non-interest income and

banks' financial performance. The first of these

relationships is to examine how non-interest

income diversifies the banks' earning portfolio. To

construct a diversification measure we use the

basic Herfindahl-Hirschman Index for each

individual bank based on their revenue flows. We

follow Morgan and Samolyk (2003), Stiroh

(2004a), Thomas (2002) and Stiroh and Rumble

(2005) to construct our diversification measure

(DIV4). Total operating income is divided into two

sub categories: non-interest income and net-

interest income and DIV4 measure is constructed

as:

DIV4 = (NONII/TOI)2 + (NETII/TOI)2

TOI = NONII + NETII

Where NONII is non-interest income and

NETII is net-interest income, TOI is total operating

income and DIV4 indicates the trailing average for

4 overlapping years from 1997-2004. We consider

an increase in DIV4 as an indicator of more

concentration and less diversification. Stiroh

(2004a) argue that as diversification in the non-

traditional activities improves the average

profitability of banks, the coefficient on DIV4 (a

concentration measure) against the profitability

measure would be negative. In terms of risk

indicators, this coefficient would be positive if it

lowers the volatility of earnings and ceteris paribus.

For empirical investigations, we follow the

econometric model used by DeYoung and Rice

(2004c). In this model, a relationship is first

established between non-interest income and its

strategic drivers such as bank specific

characteristics, market conditions, and

technological developments (equation 1). The

impact of non-interest income on risk adjusted

performance and insolvency risk of banks is then

investigated with the help of equations 2-5. The

coefficients are estimated with the help of

generalised least square (GLS) estimation

technique with random effects.

NONIIt,i

= β1

+ β2

MQUALITYt,i

+ β3

DEP2ASTSt,i

+ β4

LOANS2ASTSt,i

+ β5

CCBANKt,i

+ β6

EMP2DEPt,i

+ β7

lnASSETSt,i

+ β8

HERFXt,i

+ β9

ATMst+ β

10CASHLESS

t

+ β1

1MUTUALt+ β

12JOBGROWTH

i,t

+ β13

Time + ω i,t

(1)

Where the subscript i show banks and t

indicates years. Our dependent variable in this

equation is NONII, which is a ratio of non-interest

income to total assets. The explanatory variables

are explained in appendix 2.

The dependent variables in the equations 2-5

are ROE4, SIGMAROE4, SHARPE4, and

ZSCORE4 that determine the link between bank

performance, variability in income, risk-adjusted

return and probability of bank failure and

insolvency with the increased level of non-interest

income. Technology related variables ATM,

CASHLESS and MUTUAL are removed in

equations 2-5. Two new variables



2. Includes data on 6 public sector commercial banks (PSCBs), 13 domestic private commercial banks (DPCBs) and 11 foreign banks (FBs) operating inPakistan.

3. Small Banks(SBs) 15 in number mostly foreign banks having asset size of less than PRs. 50 billion, Medium Size Banks (MSBs) 9 in number havingasset size > PRs. 50 billion & < PRs.100 billion, and Large Banks (LBs) six in number having asset size > PRs. 100 billion.

LOANQUALITY, a measure of provision for bad

and doubtful loans as a percentage of net interest

income4 to total assets, and LOANCONC, a

Herfindahl measure to control for the effects of

loan concentration in the banking system are

included in the equations.

6. Results and Discussion

6.1 Descriptive analysis

We present the analysis of volatility in non-

interest income and net-interest income using

coefficient of variation (CV) as a measure of

dispersion (standard deviation as a percentage of

the arithmetic mean). Smith et al. (2003) suggest

that to understand the spread of a distribution, a

relative measure like coefficient of variation can

best explain the extent of deviation as a result of

changes in the mean.

The examination of the two important sources

of income i.e. non-interest and net- interest

income, in commercial banks on the basis of their

ownership reveals some interesting observations.

FBs exhibit the highest coefficient of variation

(63.4%) for non-interest income while DPCBs

show the lowest coefficient of variation (47.3%)

and standard deviation (0.08%).

Mean and risk measures of non-interest and

net-interest income of commercial banks 1997-

2004 are given in Appendix 3. It can be seen from

Appendix 3 that the coefficient of variation of net

interest income to total assets has substantially

reduced to 40.71% (from 61.9% to only 36.7%)

which suggests that over time net-interest income

has become more stable source of income. If we

judge the volatility of non-interest income and net-

interest income on the basis of their coefficients of

variation we can suggest that the volatility of non-

interest income is much higher than net-interest

income in Pakistani commercial banks.

6.2 Non-interest income equation

(NONII)

Results for the non-interest income regression

(equation 1) are reported in Appendix 4. Using

NONII (non-interest income divided by total

assets) as dependent variable in the equation, the

variable MQUALITY a proxy for the better

managed banks is statistically significant and

positive. This indicates that better managed banks

tend to generate more non-interest income and

this could be the result of income diversification

strategy.

We find that the coefficient ln ASSETS (natural

log of total assets) is insignificant suggesting that

the level of non-interest income is not a matter of

size it is rather the bank strategy that determines it.

Within the variables associated with the

technological change, the variable ATMs (number

of ATMs in the country per 1000 capita) is

significant with reasonable economic sign. The

positive coefficient on ATMs (number of ATMs in

the country per 1000 capita) indicates that banks

that have shifted much of their operations on the



4 Other measures of loan quality could not be constructed due to non-availability of data for foreign banks.

Table 1 : Mean and risk measures of non-interest and net interest income across groups of banks in Pakistan (in percent)

NONII/ASSETS NetII/ASSETSType of Group Mean St.Dev C.V Mean St.Dev C.VSBP classificationDomestic Private Commercial Banks(13) 1.8 0.8 47.3 2.5 0.9 38.2Foreign Banks(11) 2.0 1.3 63.4 2.1 1.1 53.4Public Sector Commercial Banks(6) 1.4 0.8 55.0 2.6 1.2 46.8Sample classificationLarge banks(6) 1.6 0.5 31.3 2.7 1.0 36.8Medium size banks(9) 2.0 0.9 44.9 2.6 0.9 33.5small banks(15) 1.8 1.2 69.9 2.1 1.2 56.3All banks(30) 0.020 0.019 98.82 0.024 0.011 45.22Source: Own calculation

computer based operations system tend to

generate higher level of non-interest income.

Examining the results across the three groups

of banks we find more or less the same pattern for

small and medium size banks. However for large

banks none of the coefficient is significant which

indicates that bank characteristics and other

drivers of non-interest income are insensitive to the

flow of non-interest income in theses banks. These

banks, therefore, follow the intermediation based

strategy of portfolio lending to generate higher

interest income and do not involve in non-

traditional banking activities. Within small and

medium size banks well managed banks tend to

generate higher level of non-interest income.

6.3 Bank performance equations

6.3.1 Return on equity (ROE4, equation 2)

We can see from the Appendix 5 that in terms

of average profitability in banks, the coefficients on

DIV4 and NONII4 (mean of non-interest income

divided by total assets) are both insignificant. This

result suggest that non-interest income is not an

important determinant of ROE despite of the fact

that it still contributes more than 37.5% (on

average) of the gross income in commercial banks.

This result is consistent with the findings of Stiroh

and Rumble (2005) who also find an insignificant

coefficient on diversification measure and non-

interest income in the mean ROE regression.

The positive and significant coefficient on

lnASSETS4 (mean of natural log of total assets)

indicates that firm size is an important determinant

of bank return on equity (ROE) in commercial

banks in Pakistan. The result suggests that large

banks are better off in generating higher return on

equity (ROE). This is consistent with the findings of

studies on scale economies as reported by Stiroh

(2004a) .

The negative and highly significant sign of

LOANCONC4 (mean of LOANCONC, a

Herfindahl index based on loan portfolio of banks)

indicates that banks with higher share of loan

portfolio have lower return on equity and a

possible explanation to this effect may be that the

ratio of bad loans to gross loans is very high in

large banks and they have been setting aside huge

amounts as provisions for bad and doubtful loans

since 1997. The negative sign of LOANQUALITY4

also supports our argument.

6.3.2 Volatility in return on equity

(SIGMAROE4, equation 3)

With the SIGMAROE4 (standard deviation of

ROE) as the dependent variable in Appendix 6,

the negative and significant coefficient on NONII4

(non-interest income divided by total assets)

reflects the fact that non-interest income is not

associated with the increase in the volatility of

return on equity (ROE), rather it has a stabilising

effect on ROE. Hence non-interest income neither

increases the return to shareholders nor does it

expose the shareholders to additional risks. This

result is apparently inconsistent with the

contemporary non-interest income studies but

keeping in view the decreasing trend of non-

interest income in commercial banks, we can say

that a decline in the share of non-interest income

brings stability in the overall profitability.

6.3.3 Sharpe ratio (SHARPE4, equation 4)

We have SHARPE4 (mean of ROE4 minus 4-

years trailing average 1 year Treasury bill rate

divided by SIGMAROE4) a measure of risk-

adjusted performance as the dependent variable in

equation 4. In terms of diversification we find no

evidence of diversification benefits as a positive

and statistically significant coefficient on DIV4

suggest that more concentrated banks have

improved risk-adjusted performance. The

coefficient on NONII4 (non-interest income

divided by total assets) as shown in Appendix 7 is

statistically insignificant and therefore does not

lower the risk adjusted profits of banks. Both Stiroh

(2004b) and DeYoung and Rice (2004c) report a

negative and significant relationship between non-

interest income and risk adjusted performance.

6.3.4 Z-score equation (Z-SCORE4,

equation 5)

Estimates of regression 5 using Z-score as

dependent variable are given in Appendix 8. We



use Z-score measure to see how non-interest

income increases the insolvency risk of banks. This

measure was first introduced by Altman (1968)

which gives the value of standard deviation a firm

is away form its insolvency. Banks with high Z-

score are better managed banks and have

improved risk-adjusted performance. We find a

negative and significant coefficient on NONII4

(non-interest income divided by total assets) for

the overall banking system. The negative sign

show that an increase in the value of non-interest

income reduces the Z-score and thereby increases

the probability of insolvency of banks.

7. Conclusions

This study explores the relationship between

the share of non-interest income, financial

performance, and diversification and risk

indicators in commercial banks. It also investigates

the association between non-interest income and

bank characteristics, technological developments,

and regulatory reforms.

We find reasonable evidence of diversification

benefits in commercial banks in Pakistan as our

measure of concentration not only raise the level of

volatility in earnings but also increase the probability

of insolvency. The analysis of risk indicators show

that on aggregates non-interest income does not

increase the volatility of banks' earnings.

Taken together, non-interest income has both

positive and negative implications for banks'

performance. At the one hand, it lowers the

volatility of earnings and is not associated in

lowering the risk-adjusted performance. On the

other hand, a shift towards non-traditional

activities does not increase the average profit but

increase the probability of insolvency.



Appendix 1: Summary statistics of variables

Variable Obs Mean Std. Dev. Min Max

NONII (Dep.variable) 150 0.019 0.023 -0.014 0.27MQUALITY 150 -0.005 0.213 -1.24 0.908DEP2ASTS 150 0.707 0.141 0.273 1.21LOANS2ASTS 150 0.429 0.153 0.016 0.693CCBANK 150 0.4 0.492 0 1EMP2DEP 150 0.039 0.034 0.006 0.17lnASSETS 150 10.17 1.45 6.33 13.22HERFX 150 37.03 108.34 0.00 575.79ATMs 150 0.003 0.001 0.002 0.005CASHLESS 150 430.9 261.8 151.1 887.0MUTUAL 150 261.0 93.9 169.4 378.4JOBGROWTH 150 2.625 2.428 -0.593 6.795NONII4 150 0.019 0.011 0.005 0.086DEP2ASTS4 150 0.718 0.109 0.315 0.873LOAN2ASTS4 150 0.432 0.128 0.066 0.651EMP2DEP4 150 0.046 0.041 0.006 0.204lnASSETS4 150 9.939 1.389 6.437 13.049HERFX4 150 38.42 114.25 0.00 558.05LOANQUALITY4 150 0.094 0.163 -0.494 0.658LOANCONC4 150 33.156 95.318 0 481.211JOBGROWTH 150 2.368 0.475 1.583 2.92ROE4(Dep.variable) 150 0.111 0.13 -0.3 0.458SIGMAROE4(Dep.variable) 150 0.154 0.195 0.004 0.832SHARPE4(Dep.variable) 150 0.4 3.285 -20.503 13.002ZSCORE4(Dep.variable) 150 32.33 115.127 -0.512 1354.861DIV4 150 0.579 0.078 0.502 0.885



Appendix 2: Definitions of variables

Dependent VariablesNONII Non-interest income divided by total assets.ROE4 Mean of return on equity (ROE), t-3 through t. SIGMAROE4 Standard deviation of ROE, t-3 through t. SHARPE4 Mean of (ROE4- 4-years trailing average 1 year Treasury bill rate divided by

SIGMAROE4), t-3 through t. ZSCORE4 Mean of (trailing average of ROA for four years plus four years trailing average of equity

to assets divided by the standard deviation of return on assets), t-3 through t. Z = ROA + E / A

σROA

Independent Variables

Equation 1MQUALITY Bank ROE minus the median ROE in each bank's assets class

averaged over three years (2002-2004).DEP2ASTS Total deposits of bank divided by the total assets.LOAN2ASTS Net loans divided by the total assets.CCBANK Dummy = 1 if a bank issues credit card to its customers.EMP2DEP Number of full time employees divided by total deposits.lnASSETS Natural log of total assets.HERFX Market weighted Herfindahl index is a deposit based

concentration measure.ATMs Number of ATMs in the country per 1000 capita.CASHLESS the amount of cashless transactions (value of ATM transaction

plus the amount of credit card outstanding) per capita.MUTUAL The amount of mutual fund per capitaJOBGROWTH Job growth in the country.

Equation 2-5DIV4 Mean of (NONII/TOI)2 + (NETII/TOI)2 t-3 through t. NONII4 Mean of non-interest income to assets, t-3 through t. DEP2ASTS4 Mean of DEP2ASTS, t-3 through t. LOAN2ASTS4 Mean of LOAN2ASTS, t-3 through t. EMP2DEP4 Mean of EMP2DEP, t-3 through t. lnASSETS4 Mean of lnASSETS, t-3 through t. HERFX4 Mean of HERFX, t-3 through t. JOBGROWTH4 Mean of JOBGROWTH, t-3 through t. LOANQUALITY4 Mean of provision for bad and doubtful loans as a percentage of net interest income, t-3

through t. LOANCONC4 Mean of LOANCONC, A Herfindahl index based on loan portfolio of banks, t-3 through t.



Appendix 3: Mean and risk measures of non-interest and net-interest

income of commercial banks 1997-2004

NONII/ASSETS NETII/ASSETSYear Mean St.Dev CV Mean St.Dev CV

All Banks1997 2.0 0.9 43.0 2.3 1.4 61.91998 1.9 1.1 57.0 2.3 1.3 58.21999 2.0 1.0 49.8 2.3 1.2 53.92000 1.7 0.5 28.7 2.2 1.0 45.02001 1.4 0.8 55.6 2.4 1.0 42.12002 1.7 0.8 46.1 2.4 0.8 34.42003 2.1 1.7 84.0 2.5 0.9 34.92004 1.6 1.0 60.4 2.4 0.9 36.7

Large Banks1997 1.8 0.5 30.0 2.0 1.9 97.51998 1.6 0.5 28.3 2.6 1.0 39.81999 1.5 0.4 27.8 2.5 1.0 39.32000 1.6 0.5 31.6 2.6 0.8 29.52001 1.4 0.3 24.3 3.2 1.0 30.72002 1.3 0.3 23.9 3.0 0.6 18.62003 1.9 0.8 41.2 2.8 0.5 16.22004 1.5 0.4 23.3 2.7 0.4 14.0

Medium Size Banks1997 2.4 0.8 35.0 2.6 0.7 29.01998 2.4 1.0 43.0 2.4 1.1 46.01999 2.0 0.6 28.3 2.4 1.4 59.42000 1.8 0.3 18.0 2.5 0.9 35.72001 1.6 0.4 25.6 2.7 0.8 28.22002 1.7 0.7 39.4 2.5 0.8 31.02003 2.4 1.6 64.9 2.8 0.5 17.12004 1.7 0.9 53.7 2.9 0.7 23.6

Small Banks1997 1.9 1.0 51.3 2.3 1.6 69.01998 1.7 1.2 72.2 2.1 1.6 75.61999 2.3 1.3 56.9 2.2 1.3 59.52000 1.7 0.6 33.9 1.8 1.0 55.82001 1.3 1.0 80.3 2.0 1.0 49.32002 1.8 0.9 51.7 2.0 0.8 37.62003 1.9 2.1 110.6 2.3 1.1 49.62004 1.6 1.2 75.9 2.1 1.0 49.5

Source: Own calculation



Appendix 4: Regression results for NONII equation

All Banks Large Banks Medium Size Banks Small BanksMQUALITY 0.017* 0.001 0.060*** 0.026*

(0.009) (0.005) (0.015) (0.015)DEP2ASTS -0.054*** 0.006 -0.022 -0.056

(0.02) (0.014) (0.017) (0.038)LOAN2ASTS 0.02 0.027 0.002 0.018

(0.016) (0.029) (0.013) (0.025)CCBANK 0.006 0.000 0.011* 0.002

(0.005) (0.000) (0.006) (0.012)EMP2DEP 0.148** -0.058 0.150*** 0.159

(0.061) (0.271) (0.056) (0.114)lnASSETS -0.002 0.007 -0.008 -0.009

(0.003) (0.011) (0.005) (0.009)HERFX 0.000 0.000 0.000 0.009

(0.000) (0.000) (0.001) (0.009)ATMs 40.732* 0.572 7.14 71.749*

(20.939) (17.99) (9.671) (39.559)CASHLESS -0.000** 0.000 0.000 -0.000*

(0.000) 0.000 (0.000) (0.000)MUTUAL 0.000 0.000 0.000 0.000

(0.000) (0.000) (0.000) (0.000)JOBGROWTH 0.000 0.000 0.000 0.001

(0.001) (0.001) (0.001) (0.003)

R-Square 0.19 0.37 0.08 0.28No. Obs 150 30 45 75Joint significance 0.0006 0.3469 0.000 0.0110

***, **, * indicate significance at the 1%, 5%, and 10% level respectively. Standard errors are in parentheses.



Appendix 5: Regression results for ROE4 equation

All Banks Large Banks Medium Size Banks Small BanksDIV4 -0.069 5.161*** -0.316 -0.522**

(0.174) (1.404) (0.217) (0.203)NONII4 1.797 24.26 -4.131** 3.526***

(1.165) (18.00) (2.001) (1.105)DEP2ASTS4 -0.314* 0.044 -0.288 -0.262

(0.178) (1.47) (0.318) (0.225)LOAN2ASTS4 0.068 0.554 0.499 0.19

(0.131) (1.173) (0.365) (0.187)CCBANK4 -0.08 0.000 -0.022 -0.09

(0.051) (0.000) (0.028) (0.130)EMP2DEP4 -0.088 -6.041*** 0.159 -0.627

(0.411) (2.191) (0.522) (0.576)lnASSETS4 0.105*** (0.060 0.138*** 0.166***

(0.021) (0.062) (0.048) (0.049)HERFX4 0.001** 0.000 -0.002 0.071

(0.000) (0.001) (0.013) (0.166)LOANQUALITY4 -0.087 0.287 -0.193 -0.166***

(0.061) (0.361) (0.123) (0.062)LOANCONC4 -0.002*** 0.000 -0.013 -0.164

(0.001) (0.001) (0.014) (0.119)JOBGROWTH4 -0.006 -0.03 0.007 -0.016

(0.015) (0.054) (0.021) (0.017)R-Square 0.15 0.62 0.58 0.02No. Obs 150 30 45 75Joint significance 0.000 0.0005 0.000 0.000

***, **, * Indicate significance at the 1%, 5%, and 10% level respectively. Standard errors are in parentheses.



Appendix 6: Regression results for SIGMAROE4 equation

All Banks Large Banks Medium Size Banks Small BanksDIV4 0.654*** -2.616 0.184** 1.125***

(0.194) (1.834) (0.089) (0.296)NONII4 -3.376*** 12.625 3.854*** -5.210***

(1.258) (23.53) (0.822) (1.678)DEP2ASTS4 0.004 -1.097 0.594*** -0.102

(0.199) (1.92) (0.131) (0.319)LOAN2ASTS4 0.033 2.610* -0.436*** -0.065

(0.158) (1.534) (0.150) (0.253)CCBANK4 -0.036 0.000 -0.027** -0.127

(0.074) (0.000) (0.011) (0.14)EMP2DEP4 0.995** 5.345* -0.844*** 1.577**

(0.498) (2.863) (0.214) (0.777)lnASSETS4 (0.003) 0.057 -0.024 0.000

(0.025) (0.081) (0.02) (0.061)HERFX4 -0.003*** 0.001 -0.015*** -0.331

(0.001) (0.001) (0.005) (0.242)LOANQUALITY 0.079 0.315 0.145*** 0.158*

(0.064) (0.471) (0.051) (0.096)LOANCONC4 0.005*** -0.001 0.017*** 0.301*

(0.001) (0.001) (0.006) (0.174)JOBGROWTH -0.013 0.011 -0.005 -0.011

(0.015) (0.071) (0.008) (0.026)R-Square 0.25 0.74 0.7 0.3No. Obs 150 30 45 75Joint significance 0.0000 0.0000 0.0000 0.0013




Appendix 7: Regression results for SHARPE4 equation

All Banks Large Banks Medium Size Banks Small Banks

DIV4 8.182* 25.589** -0.436 6.646(4.248) (12.76) (4.559) (5.114)

NONII4 -5.564 -286.5* -163.9*** 48.29(28.30) (163.7) (42.08) (38.27)

DEP2ASTS4 -3.916 9.071 -23.00*** 11.92**(4.328) (13.36) (6.69) (5.733)

LOAN2ASTS4 1.513 -22.67** 16.46** -6.322(3.219) (10.671) (7.67) (3.862)

CCBANK4 0.117 0 -0.422 1.395(1.276) (0.000) (0.588) (1.561)

EMP2DEP4 -19.01* -75.35*** -1.392 -39.21***(10.09) (19.92) (10.98) (11.50)

lnASSETS4 1.678*** 1.085* 4.682*** -0.845(0.507) (0.564) (1.009) (0.936)

HERFX4 -0.003 -0.032*** 0.468* -7.229*(0.012) (0.009) (0.278) (4.269)

LOANQUALITY 1.283 4.218 -3.507 5.304**(1.471) (3.281) (2.587) (2.358)

LOANCONC4 -0.01 0.028*** -0.844*** 8.820***(0.013) (0.009) (0.285) (2.927)

JOBGROWTH -0.007 0.385 0.406 -0.266(0.358) (0.491) (0.433) (0.736)

R-Square 0.21 0.71 0.69 0.57No. Obs 150 30 45 75Joint significance 0.0008 0.000 0.0000 0.000

***, **, * indicate significance at the 1%, 5%, and 10% level respectively. Standard errors are in parentheses.

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Appendix 8: Regression results for Z-SCORE4 equation

All Banks Large Banks Medium Size Banks Small BanksDIV4 -361.64** -535.0 -24.01 -419.5*

(154.4) (384.86) (39.92) (237.7)NONII4 -4,447.6*** -10,932.6** -590.6 -5,851.4***

(1,192.1) (4,936.7) (412.7) (1,883.5)DEP2ASTS4 -607.7*** -1.09 -68.71 -804.9***

(163.2) (402.9) (74.76) (272.9)LOAN2ASTS4 -163.1* -330.29 138.4** -62.99

(92.07) (321.7) (65.89) (178.5)CCBANK4 -22.01 0.000 5.739 -28.54

(29.30) (0.000) (5.350) (70.66)EMP2DEP4 287.8 600.4 205.2** 637.6

(284.3) (600.6) (92.73) (525.5)lnASSETS4 17.94 -3.421 -2.478 -9.894

(17.03) (16.99) (9.361) (43.88)HERFX4 -0.026 -0.24 3.222 233.2

(0.274) (0.261) (2.502) (198.0)LOANQUALITY -41.57 -82.36 -55.263** -65.29

(69.73) (98.91) (21.95) (117.4)LOANCONC4 0.003 0.209 -3.286 -113.439

(0.325) (0.2820 (2.562) (134.7)JOBGROWTH 36.18* 5.704 -1.627 46.63

(19.35) (14.790 (3.965) (37.98)R-Square 0.19 0.49 0.43 0.23No. Obs 145 30 40 75Joint significance 0.0011 0.0495 0.0332 0.058




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The Journal of Portfolio Management,

Fall 1994; reprint Institutional Investor, Inc.,

488 Madison Avenue, New York, N.Y.

Available at: 10022http://www.stanford.edu/

wfsharpe/art/sr/sr.htm.

Thomas, S. (2002), 'Firm diversification and

asymmetric information: Evidence from

analysts' forecasts and earnings

announcements', Journal of Financial

Economics, 64 pp. 373-396.


Credit Risk Management System

FEROZEALI HUSSAINIOfftg/ Head of Risk ManagementFirst Women Bank Ltd. Head Office Karachi

Introduction

In carrying out their functions banks are

exposed to several types of risks. Credit risk,

market risk, liquidity risk, operational risk, legal risk

and reputation risk are some of the risks banks are

exposed to. While banks and other financial

institutions have faced difficulties for a multitude of

reasons, credit risk is the most common cause of

bank failures, forcing all regulatory authorities to

prescribe minimum standards for credit risk

management.

The business of banking is about managing

risks. Every banker knows it. But very often

incidents are reported globally and locally, which

make the ordinary public wonder whether bankers

really do know about it. Although the Asian crisis

in the '90s was caused by the inflation of asset

values due to inefficiency of the regulatory

systems, the risky lending by banks and financial

institutions had led to this asset inflation. This crisis

saw several banks which had lax risk management

systems and lent extensively to the speculative

property sector being left with large bad loans

when the bubble burst. Large losses due to loan

default is not unknown even in the local banking

sector.

Risk management has assumed increased

importance from the regulatory compliance point

of view. Credit Risk being an important

component of risk, has been adequately focused

upon. Credit risk management can be viewed at

two levels - at the level of an individual asset or

exposure and at the portfolio level. Its tools

therefore have to work at both individual and

portfolio levels. Traditional tools of credit risk

management include loan policies, standards for

presentation of credit proposals, delegation of loan

approving powers, multi-tier credit approving

systems, prudential limits on credit exposures to

companies and groups, stipulation of financial

covenants, standards for collaterals, limits on asset

concentrations and independent loan review

mechanisms. At the heart of credit risk

measurement and management is a fear: what has

gone shall not return. The process of risk

management, therefore, becomes a series of

mechanisms to pre-empt such an occurrence. The

process of mitigation, in whatever form expressed,

starts as early as the disbursement stage and

continues till the money comes back to the lender-

along with the interest.

What Is Credit Risk ?

Credit risk is defined as the possibility of losses

associated with diminution in the credit quality of

borrowers or counter parties. In a bank's portfolio,

losses stem from outright default due to inability or

unwillingness of a customer or counter party to

meet commitments in relation to lending, trading,

settlement and other financial transactions.

Alternatively, losses result from reduction in

portfolio value arising from actual or perceived

deterioration in credit quality. Credit risk emanates

from a bank's dealings with an individual,

corporate, bank, financial institution or a

sovereign. It may take the following forms:

* In the case of direct lending: principal/and or

interest amount may not be repaid;

* In the case of guarantees or letters of credit:

funds may not be forthcoming from the

constituents upon crystallization of the liability;

* In the case of treasury operations: the payment

or series of payments due from the counter

parties under the respective contracts may not

be forthcoming or ceases;

* In the case of securities trading businesses:

funds/ securities settlement may not be

effected;


* In the case of cross-border exposure: the

availability and free transfer of foreign

currency funds may either cease or restrictions

may be imposed by the sovereign. It is

imperative that every bank should have a

sound credit risk management system

integrated into the overall risk management

framework. The goal of credit risk

management is to maximize a bank's risk-

adjusted rate of return by maintaining credit

risk exposure within acceptable parameters.

Banks should have a keen awareness to

identify, measure, monitor and control credit

risk and should have adequate capital to

absorb these risks. The shareholders of the

banks expect adequate compensation on their

investments.

Objectives of CRMS

* Strengthening the Credit Appraisal Procedures

of Banks: This is achieved by generating

accurate and reliable credit information on

bank borrowers from a central database. With

such information available, banks will be in a

better position to appraise the repayment

capabilities of customers seeking new or

additional credit facilities from them. This will

reduce or eliminate the granting of loans to

customers who had no capacity to repay

and/or already had non-performing and

sometimes abandoned loans in other banks.

* Storage and dissemination of Credit Data: The

Credit Bureau captures all credits from banks'

monthly returns on all their customers. Banks

are also required to provide all other relevant

data on the facilities such as names of

borrowers, directors of borrower companies,

credit limit, outstanding amount, status of

credit, securities pledged, etc. These data are

collated in the CRMS database, which are

made available to banks through credit status

enquiry/report. The customers who meet their

obligations as contracted will consequently

continue to have access to credit facilities,

while delinquent customers are denied access

to new facilities from other banks until they

make good their outstanding delinquent

credits.

* Monitoring of Over-Exposure to Borrowers:

The consolidated credit information generated

by the Credit Bureau will enable banks to

identify borrowers who have contracted debts

in excess of their repayment capabilities. Banks

are thus put on notice to avoid putting their

funds into areas or sectors that are already

experiencing a respite or declining prospects. It

will also assist banks in the evaluation of the

viability or otherwise of proposals on loans

from customers.

* Facilitating Consistent Classification of Credits:

The Credit Bureau will facilitate regulators'

consistent classification of credits granted to

the same borrower[s] by different banks.

* The Regulator will also have first hand

information on a customer's global debt profile

thereby eliminating the erroneous classification

of a customer's loan as performing in one bank

and doubtful or lost in another bank.

Components of a Good Credit Risk

Management System

In a bank, an effective risk management

system should comprise of the following

components:-

i. Credit Policy

ii. Credit Strategy

iii. Organisational structure

iv. Credit Process

v. People

vi. Credit Culture

i. Credit Policy

Managing credit risk is a fundamental

component in the safe and sound

management of all banks. Sound credit risk

management involves prudently managing the

risk/reward relationship and controlling and

minimising credit risks across a variety of

dimensions, such as quality, concentration,

currency, maturity and security. A bank should

have a Credit Policy which has been approved

by the Board. Credit policy is the foundation

on which Credit Risk Management of both

portfolio and processes are built. Its aim is to

ensure a uniform credit extension to be

practised throughout the bank. A Credit Policy



serves as the basis for consistent credit risk

management throughout the bank through

product, segment, geographic and

organizational divisions and should apply to all

employees at all levels dealing in credit risk.

Credit policies which define appropriate

behaviour in lending business should support

bank's business strategies. Inter-alia it would

lay down the requirements for employees

dealing with credit risk, compliance guidelines

on risk exposures, policies on collateral and

areas to be avoided. Credit policies need to

contain, at a minimum:

* a credit risk philosophy governing the extent to

which the institution is willing to assume

credit risk;

* general areas of credit in which the institution

is prepared to engage or is restricted from

engaging;

* clearly defined and appropriate levels of

delegation of approval, and provision or write-

off authorities; and

* sound and prudent portfolio concentration

limits. Credit Policy approved by the Board

should be communicated to all units/ branches

engaged in lending activities and personnel

responsible for this activity has to be held

accountable for adhering to these policies in

letter and spirit. The senior management of a

bank is responsible for implementing the credit

policy approved by the Board.

ii. Credit Strategy

Each bank should develop its own credit risk

strategy that establishes the objectives guiding

the bank's credit granting activities and adopt

necessary policies/procedures for conducting

of such activities. This strategy should spell out

clearly the organisation's credit appetite and

the acceptable level of risk-reward trade off for

its activities.The strategy should include

statements indicating bank's willingness to

grant loans in different economic sectors,

industrial sectors and geographical locations, if

relevant. It would also include decisions to

enter different market segments. Credit

strategy also should define target markets, risk

acceptance criteria, credit origination/

maintenance procedure and guidelines for

portfolio management. This strategy would

translate into identification of target markets

and business sectors, diversification or

concentration. It would also take into account

the cost of capital in granting credit and cost of

bad loans. The credit strategy should provide

for continuity in approach and also take into

account the cyclical aspects of the economy

and its impact on the composition / quality of

the portfolio. It should be viable in the long run

and through various economic cycles.

iii. Organizational Structure

A sound organization structure is a pre-

requisite for the successful implementation of a

credit risk management system. Times have

changed when the CEO of the bank had

discussed and agreed with the customer to

lend money and the credit department was

requested to process the loan. In an effective

system, the Risk Management function would

be independent of the business lines and there

should not be any conflict of interest between

the Credit Risk Management function and the

business origination divisions. A possible

structure for a credit risk management function

would be as follows:-

Depending on the size of the bank the structure

would differ and lending authority would be

delegated at different levels. In any type of

structure, the Board of directors should have the

ultimate responsibility for management of risks.

Board should approve the credit policy and



delegate authority to senior management to set the

required parameters in limits, guidelines and

procedures in setting the liquidity, interest rate,

foreign exchange and price risks. In large banks

there will be a Risk Management Committee,

which is a Board level sub-committee comprising

of CEO and heads of Credit, Market and

Operational risks. This committee will devise the

policy and strategy for an integrated risk

management covering various risks of the bank

including credit risk. For this purpose the

committee should effectively coordinate between

the Executive Credit Committee (ECC), the Asset

and Liability Management Committee (ALCO)

and other risk committees, if any. In banks that

follow the best practices, a Senior Risk Manager

who is responsible for the bank-wide risk

management function is appointed. This individual

and his team are empowered with the

responsibility to evaluate the bank-wide risks. This

team holds line officers more accountable for the

risks under their control. The reward system of the

line officers is according to the overall profitability

in their individual account portfolios and not on

business volumes.

iv. Credit Process

A typical credit process would involve the

following steps:-

1. Limit/reduce credit exposures - placing

limits on customer, product, economic, industry

and geographical sectors.

2. Asset Classification - Apart from the risk

rating assigned to each client as per the risk rating

system adopted by the bank at the initiation of the

relationship, it is necessary to identify in a timely

manner any deterioration in the borrower's

standing. This could be due to external factors,

changes in management , cash-flow constraints or

a number of other criteria which should be

construed as warning signals. Although there

would be no defaults at this stage, borrowers who

give such signals should be "watch listed" and

downgraded.

3. Provisioning for losses - The State Bank of

Pakistan has laid down minimum requirements on

classification of Non Performing Loans (NPLs) and

provisioning for specific losses. Banks are

encouraged to make general / judgmental

provisions, over and above the minimum

requirements.

4. In the process of managing the credit portfolio,

the following proactive measures are taken:-

* Annual review of all existing obligors and a

brief semi-annual review of new engagements;

* Periodic reviews of industrial sectors;

* Periodic calls, visits to the sites;

* At least quarterly reviews of weak (watch list)

clients;

* Periodic stock inspection;

* Quick portfolio reviews when adverse

industry/political/ economic indicators are

shown.

* Periodic reviews of the entire portfolio;

* Ensure that all borrowers in the bank have a

Risk Rating; Business lines, Credit

Committee/s, Credit Risk Department and the

Credit Audit Unit would be the main bodies

involved in the credit process.

Role of the Board of Directors:

The Board of Directors of each bank is

ultimately responsible for the integrity of the

institution's credit risk management function.

In discharging its responsibility, the Board

usually charges management with developing

credit policies for the Board's approval, and

developing and implementing procedures to

manage and control the structure and quality

of the bank's credit portfolio, and the level of

credit risk assumed within these policies, and

ensuring that such policies remain adequate,

comprehensive and prudent.The Board needs

to have a means of ensuring compliance with

the credit risk management program. The

Board generally ensures compliance through

periodic reporting by management and

internal inspectors/ auditors. The reports must

provide sufficient information to satisfy the

Board that the bank is complying with its credit

risk management policies. At a minimum, the

Board should:

* review and approve credit risk management



policies recommended by the bank's

management;

* review periodically, but at least once a year,

the credit risk management programme;

* ensure the selection and appointment of

qualified and competent management to

administer the credit risk function;

* ensure that an internal inspection/audit

function reviews the credit operations to assess

whether or not the institution's policies and

procedures are being adhered to, and

whether the policies effectively contribute to

the achievement of corporate objectives;

* review credits to, or guaranteed by officers of

the international bank, including policies

related thereto;

* review credits to directors or firms in which

they are partners, directors or officers,

including policies related thereto;

* review credits to corporations controlled by the

correspondents bank, or their officers or

directors, including policies related thereto;

* ratify credits exceeding the level of authority

delegated to management;

* review significant credit exposures;

* review trends in portfolio quality and the

adequacy of the bank's provision for credit

losses; and

* outline the content and frequency of

management reports to the board on credit risk

management.

ROLE OF MANAGEMENT

The management of each bank is responsible

for implementing the institution's credit risk

management policies and ensuring that

procedures are put in place to manage and control

credit risk and the quality of the credit portfolio in

accordance with these policies. Although specific

credit risk management responsibilities will vary

from one bank to another, management at each

institution is responsible for:

* developing and recommending credit risk

management policies for approval by the

board of directors;

* implementing the credit risk management

policies;

* ensuring that credit risk is managed and

controlled within the credit risk management

programme;

* ensuring the development and implementation

of appropriate reporting systems with respect

to the content, format and frequency of

information concerning the credit portfolio and

credit risk, to permit the effective analysis and

the sound and prudent management and

control of existing and potential credit risk

exposure;

* monitoring and controlling the nature and

composition of the bank's credit portfolio;

* monitoring the quality of the credit portfolio

and ensuring that the portfolio is soundly and

conservatively valued, uncollectible credits

written off, and probable losses adequately

provided for;

* ensuring that an internal inspection/audit

function reviews and assesses the credit

portfolio and credit risk management

programme;

* developing lines of communication to ensure

the timely dissemination of credit risk

management policies and procedures and

other credit risk management information to all

individuals involved in the credit process; and

* reporting comprehensively on significant credit

activities, the composition and quality of the

credit portfolio, and the credit risk

management program to the board of directors

at least once a year.

* Executive Credit Committee

Each bank, depending on its size will have a

Credit Committee/s which would comprise of

the CEO, Head of Credit Department, Head of

Credit Risk Management Department and

relevant business line heads. Some of the

functions of the Credit Committee would be as

follows, depending on whether the Committee

is an approval authority or only has an

advisory capacity:-

* Be responsible for implementation of the credit

policy/strategy approved by the Board/Board

Credit Committee.

* Recommend to the Board for approval,

standards for presentation of credit proposals,



financial covenants and rating standards.

* Recommend to the Board the delegation of

credit authority, limits on large credit

exposures, sector exposures, loan review

mechanism, risk monitoring, evaluation,

pricing of loans, provisioning etc.

* Pre-clear large/unusual credit proposals

* Approval of credit under its authority

Credit Risk Management Department

Ideally a bank should have an independent

credit risk department, which would be responsible

for the following functions:-

* Control and monitor credit risk on a bank-wide

basis within the limits/ parameters set by the

Board/ Credit Committee.

* Lay down risk assessment systems, monitor

quality of loan/investment portfolio, identify

problem loans, monitor the use of risk rating

system and loan reviews.

* This unit also should monitor and assess the

external factors which would have an impact

on the portfolio and take pro-active measures

to mitigate these risks and keep the Credit

Committee/Board informed of impending

risks.

* Present periodic portfolio reviews to the

Board.

Internal Credit Inspection/Audit

Credit Audit examines compliance with extant

sanction and post-sanction processes/ procedures

laid down by the bank from time to time. Working

parallel to the Internal Audit Unit, this unit has to

function independently and the reporting line is

direct to the Board/Audit Committee through the

CEO. Its functions would be to carry out periodic

audits to ensure that credit policy guidelines and

procedures are adhered to. It would further make

recommendations to improve existing systems

and procedures. Internal credit inspections/audits

verify the continuing adequacy and applicability of

credit risk management policies and procedures,

provide an independent assessment of the credit

portfolios' existing quality and value, the integrity

of the credit process, and promotes detection of

problems relating thereto. Assessments should, at a

minimum, randomly test all aspects of credit risk

management in order to determine that:

* credit activities are in compliance with the

bank's credit and accounting policies and

procedures, and with the laws and regulations

to which these credit activities are subject;

* credits exist, are duly authorized, and are

accurately recorded and appropriately valued

on the books of the bank;

* credits are appropriately rated;

* credit files are complete;

* potential problem accounts are being identified

on a timely basis and determine whether the

international bank's provision for credit losses

is adequate; and

* credit risk management information reports are

adequate and accurate.

Assessment of the credit risk management

activities should be presented to the bank's

Board of Directors on a timely basis for review.

v. People

Selection of the staff for the entire process is as

important as having a well thought out

structure. The Relationship Managers who

initiate the business need to have the correct

attitude and drive. Whilst it is their function to

market business which fall within the purview

of the credit policy and target market, they

should be adequately trained to identify and

evaluate the risks. As they are rewarded

according to the profitability of their respective

portfolios, they are responsible for the timely

identification and mitigation of any risk that

could end up in loss situations. A continuous

upgrading of skills is mandatory to keep a

motivated staff and to maintain a quality

portfolio.

vi. Credit Culture

Most of the successfully established banks

globally have recognized that asset growth for

the sake of growth does not necessarily bring

shareholder value and that setting asset targets

without an awareness of returns not

commensurate with risks is disastrous to a

bank. The kind of problems that indicate



distortion in a bank's credit culture could be

summarized as below :-

Related party dealings - An over extension

of credit to directors, parties related to directors

and large shareholders.

Compromise of credit principles - where

loans with undue risks and unsatisfactory terms

are granted with full knowledge due to

pressure from related parties, competitor

pressures or personal conflicts of interest.

Anxiety over income - Usually the loan

portfolio is the key revenue generating asset in

a bank. When business lines are pressurized to

achieve targets, there is a tendency to

compromise accepted norms of good lending

principles and loans may be extended with the

hope that the risks identified may not be

realized.

Incomplete credit information - In order to

ascertain the borrower's repayment capacity, a

complete analysis of the financial condition,

market position, industry data is vital. An

analysis of the purpose of the loan, use of

borrowed funds and source of repayment

together with continuous supervision

supported by documented call visits is

mandatory information in managing a loan.

Complacency and name lending - Lack of

adequate supervision of long standing familiar

borrowers or known names in the market,

dependence on oral information rather than

reliable and complete financial data or an

optimistic interpretation of apparent

weaknesses in view of the survival of adverse

situations in the past. Further banks may

ignore warning signals regarding borrowers,

economy, industry, supply chains or any other

unfavorable development affecting the

borrower, without taking appropriate action by

either considering a re-structure or enforcing

repayment agreements such as legal action in

a timely manner.

Lack of supervision - Insufficient supervision

results in lack of knowledge about the

borrower's affairs over the lifetime of the loan.

External conditions may have changed the

borrower's conditions and may have affected

his repayment capacity. When funding

working capital requirement, constant

supervision on Company's cash -flows through

their current accounts, monitoring of timely

settlement of short term loans is mandatory

Technical incompetence - Deficiency in the

knowledge of credit officers in evaluation of

credit and interpretation of financial/other

information. There should be continuous

training and upgradation of skills of the officers

engaged in handling of loan facilities.

Poor selection criteria of risks - these

would typically be the following:-

* extension of credit with initially sound financial

risk to a level beyond the reasonable

repayment capacity of the borrower;

* absence of a clearly identified target market -

annually bank should study the economic

environment, assess opportunities / threats and

identify a target market;

* loans to companies operating in economically

distressed areas or industries;

* loans granted without adequate security

margins or against collaterals which are

difficult to enforce;

New Basel II Accord and Credit Risk

Management

The aim of the new Basel II Accord is to ensure

that bank regulatory authorities world over fully

recognize the impact of risk on the capital

requirements. Preparations for Basel II will focus

on improved management of credit risk and

operational risk, and data capture and

management. Given the new Accord's insistence

that data be smoothly captured and managed

across all business areas, and its demand for large

amounts of historical data, many banks need to

look closely at their systems capabilities. To do all

these things in a way which will minimize



disruption and maximize efficiency and

profitability could well be the greatest challenge of

all.

In the light of the requirement under Basel II

for banks and their supervisors to assess the

soundness and appropriateness of internal credit

risk measurement and management systems, the

development of methodologies for validating

external and internal rating systems is clearly an

important issue. More specifically, there is a need

to develop tools for validating the systems used to

generate the parameters (such as PD, LGD, EAD

and the underlying risk ratings) that serve as inputs

to the IRB approach to credit risk. In this context,

validation comprises a range of approaches and

tools used to assess the soundness of these

elements of IRB systems. The advanced

implementation options of Basel II explicitly

require financial institutions to assess the credit

exposure for each customer and for each credit

facility using the following measures:

Probability of Default (PD) - the probability

that a specific customer will default within the next

12 months.

Loss Given Default (LGD) - the percentage

of each credit facility that will be lost if the

customer defaults.

Exposure at Default (EAD) - the expected

exposure for each credit facility in the event of a

default.

Once the financial institution is able to assess

the PD, LGD and EAD for its customers and for its

credit facilities, the calculation of the minimum

capital requirement is straightforward. The main

challenges faced by financial institutions are the

aggregation of the risk-related information needed

to assess the PD, LGD and EAD for their

customers and the implementation of a risk rating

system that can correctly model these parameters

and that is statistically valid.

Banks that deliver these new and sophisticated

internal risk management capabilities first will gain

the advantage. Basel II compliance requires senior

executives to stimulate action in all key areas e.g.,

risk methodology, data history and risk mitigation,

etc. Ensuring the coordination of all relevant

activities across all portfolios and businesses will be

a major challenge for management throughout the

implementation effort.

Importance of Credit Rating

As the concept of the new Basel II Accord

revolves round risk weight to different risk

categories, Risk Rating systems will have an

important place in the framework of a credit risk

management system. The Basel II recommends

three levels of rating systems as indicated below:-

Methodology Rating Method

Standardized Approach External Credit Rating Agencies

Internal Based Approach (IRB) Internal Risk Scoring- Foundation ModelInternal Ratings Based Internal Risk Scoring Approach- Advanced Model

Adopting the IRB entails sophisticated rating modelswhich in turn will require large investments intechnology.

Credit Review & Monitoring

Most outstanding credits and commitments to

extend credit are contingent upon borrowers

maintaining specific credit standards.

Consequently, banks need to regularly monitor the

status of borrowers and re-evaluate individual

credits and commitments, and their ratings,

particularly credit to owners and directors.

Reliance on unreviewed credits and optimistic

economic forecasts can lead to a serious

deterioration of the credit portfolio. Accordingly,

the credit risk management programme of each

bank must include procedures governing the

regular formal review and, where applicable, the

re-rating of individual credits. An effective internal

credit review system should include as a minimum

an independent review,with regular analysis, and a

re-rating of credits by account officers. Because of

their frequent contact with borrowers, account

officers are in a position to detect changes in a



borrower's operations or financial condition. This

permits these officers to identify potential problems

before they may be discovered by independent

credit reviewers. Accordingly, credit review

systems must ensure that an account/credit officer

is monitoring credit quality and, where applicable,

underlying security on an on-going basis.

Common objectives of effective credit review

systems include:

* ensuring that the bank is aware of the

borrowers' current financial condition;

* ensuring that collateral security is adequate

and enforceable relative to the borrowers'

current circumstances;

* ensuring that credits are in compliance with

their covenants and margins;

* providing early identification and classification

of potential problem credits; and

* providing current information regarding the

quality of the loan portfolio.

Knowing Your Credit Risk

The accurate assessment of credit cost requires

a fairly modern credit risk assessment and

management system. Poor credit risk management

is by far the most serious problem faced by

domestic banks.

What does it take to implement a good credit

risk assessment and management system?

Information is at the very heart of the answer. For

pricing purposes, the information systems should

be designed to track credit costs for the various

product segments. The lending institutions can

also look up to external databases such as credit

bureaus to further enhance their information store.

Key attributes of a risk management system that

would assist management in assessing the

expected losses or expected credit costs is a

function dealing with two aspects; i.e. the

probability of default and loss in the event of

default (as shown in the diagram below).

Estimating probability of default and loss given

default, requires both qualitative and quantitative

analysis along with expert judgement. Despite the

subjective elements involved, through regular use

banks would be able to refine the process to a fair

level of accuracy to estimate credit cost for any

particular/or pool of facilities.

Probability of Default

Estimating probability of default for a loan or a

product segment is usually carried out through the

use of internal credit rating systems. Typically an

internal rating system factors in a series of both

quantitative (revenue, cash flows, leverage etc)

and qualitative (quality of management, market

position, industry features) factors. These factors

would be assigned specific weights or points,

which collectively determine the ultimate rating.

An estimate of probability of default of a particular

borrower is arrived at by studying the default

history within that rating category. . Based on the

above, it is clear that data plays a pivotal role in

implementing a sound internal rating system. Data

collection must cover a reasonable period in order

to properly assess loss related probabilities.

External data adequately validated could be used

in the absence of a proper internal data base or

coupled with internal data to further enhance the

database.

Loss Given Default

The other component of estimating expected

loss is the assessment of loss experience given

default. The quality of the collateral would

obviously play a crucial role in this area, besides

focus on an aspect that appears to have been

somewhat neglected by quite a few of the local

banks, i.e. the banks NPL work out procedures

and the effectiveness of the department/unit which

could contribute significantly in reducing the loss



Probability of Default Loss Given Default Expected Loss

Based on Rating from Value of Facility, Seniority, Maturity, Collateral Expectedthe Internal Rating System X Guarantees and expert judgement based = Loss

on previous experiences

experience. Often banks retain collateral for a

substantial period of time with the hope of realizing

higher disposal value, but neglect aspects such as

cost of carry and time value, ultimately realizing

less value in economic terms. By ensuring that

disposal and realisation of collateral is carried out

on a more frequent basis, the management would

ensure that valuation of collateral is more realistic.

The regular realization of collateral would also

ensure that assumptions made regarding loss

experience are realistic and reflect current market

conditions. Given that the unit is responsible for a

fairly significant portion of the banks assets, the

NPL recovery unit must be treated as a specialist

function that is provided with adequate resources

and supported by other functions of the bank,

especially loan approval and monitoring. Staff

must possess strong negotiation skills that are

important in re-structuring of credit facilities and

for realizing optimal value during disposal of

collateral.

Building Strong Databases(Data and IT

Systems)

In all likelihood, data and IT systems will be the

most costly component of Basel II compliance. The

work in this area will vary between banks,

depending on current levels of systems

sophistication and integrity. The length of

historical data required will put IT functions under

a very tight timeframe to complete it within

scheduled time. Financial institutions need to

prepare their plans quickly and proactively by

understanding the impact and determining the key

changes that need to take place. Data and IT

system changes will generally fall into one of the

following categories:

* Data collection and storage mechanisms;

* Development/enhancement of internal credit

risk rating systems, and

* Reporting systems.

Effective data collection and storage have

always been a challenging part of banks' IT

functions. Basel II will require greater data

integration and consolidation across the whole

business. Internal credit risk rating will also require

significant system development, making it critical

for banks to assess the effectiveness of their

existing systems and identify functional gaps.

Reporting systems are another important

component in filling out the Basel II framework.

Calculation of capital requirements and data

granularity will need to be covered within this area.

Conclusions

Despite the rapid transformation in the

banking sector, where the traditional interest

income derived from lending is changing to fee-

based income/ business through innovative

ancillary products and services, lending will

continue to be the core income source for most

banks . Hence managing credit risk system

effectively will continue to be an important area

which warrants the attention of banks and

supervisory authorities. The new Basel II Accord is

a step in this direction. Profit motives and

regulatory directives (notably Basel II, which

provides incentives by way of lower capital set-

asides for adopting superior risk management

techniques) have and shall continue to drive best

practices in credit risk management system for

retail lending. Advances in technology provide the

necessary impetus for these models to bridge the

gap between academic articulation and actual

deployment of resources. To mitigate credit risk

related to investment operations a credit risk

model is used to decide on limits. The model

focuses on a number of factors, namely credit

ratings, presence of a legal netting agreement,

existing cash limits, inter bank lendings, loans

drawn down, net exposure, and any other relevant

information relating to counterparties. The

mitigation of credit risk exposures are well

documented and updated regularly.

Best practices include:

* Determining risk tolerance

* Defining the model portfolio

* Loan policy/procedures

* Organization of the lending function

* Approval process

* Asset quality rating framework

* Risk-based pricing

* Quantifying portfolio risk



* Comprehensive portfolio monitoring/reporting

* Portfolio pruning

* Active portfolio management to achieve the

model portfolio

* Loan officer responsibilities, workload,

performance appraisal, and incentives

* Loan review

* Allowance for loan and lease losses

methodology

References

Hennis van Greuning & Sonja Brajovic

Bratanovic. Analyzing Banking Risk - A

Framework for Assessing Corporate

Governance and Financial Risk Management.

Allen M. 1994. Building a role model. Risk

7(9): 73-77

Brenner M. 1979. The sensitivity of the

efficient market hypothesis to alternative

specifications of the market model. Journal of

Finance 34(4): 915-29

Brown S J and J B Warner. 1980. Measuring

security price performance. Journal of

Financial Economics 8(3): 205-58

Dimson E and P R Marsh. 1990. Volatility

forecasting without data-snooping. Journal of

Banking and Finance 14, 399-421

Dimson E and P R Marsh. 1994. The Debate

on International Capital Requirements. City

Research Project Report 8. Corporation of

London

Guldimann T. 1995. Risk Metrics Technical

Document, Third edition. Morgan Guarantee

Trust Company, New York

Irving R. 1995. Country in Crisis. Risk 8(3): 27-

33Longerstaey J and P Zangari. 1995. A

transparent tool. Risk 8(l): 30-32

Merton, R C. 1995. Financial innovation and

the management and regulation of financial

institutions. Journal of Banking and Finance

19(3): 461-482

Merton R C and A F Perold. 1993. Theory of

risk capital in financial firms. Journal of

Applied Corporate Finance 6(3): 16-32Sharpe

W F. 1963. A simplified model for portfolio

analysis. Management Science 9:277-293.




Credit Guarantee Scheme For SMEs

MUHAMMAD FAROOQ*Officer Grade IINational Bank of Pakistan

Development of Small and Medium

Enterprises (SMEs) is a tool that has been

introduced in many countries all over the world,

particularly in developing countries, as one of the

potential contributors to poverty alleviation,

growth in national economies, and a source of

employment opportunities1. The importance of

SME sector cannot be underestimated. This sector

is contributing considerably in GDP growth,

employment generation and poverty reduction in

Pakistan. SME is accounting for 30 % of GDP in

Pakistan and employs more than 78% of the non-

agriculture labor force. SMEs are contributing

Rs.140 billion to exports of Pakistan and account

for 25% of exports of manufactured goods besides

sharing 35% in manufacturing value added2.

According to more recent estimates, there are

approximately 3.2 million business enterprises in

Pakistan. Enterprises employing up to 99 persons

constitute over 95% of all private enterprises in the

industrial sector3. The Observatory report SMEs in

Europe 2003 reveals that there are 19.3 million

enterprises in the European Economic Area (EEA)

and Switzerland, providing employment for 140

million people. Some 92 % of these enterprises are

micro, 7 % are small, less than 1% are medium-

sized and only 0.2 % are large enterprises. Just

over two thirds of all jobs are in SMEs4.

A major barrier to rapid development of the

SME sector is the shortage of both debt and equity

financing, coupled with laws and regulations that

restrain rather than encourage development of

new enterprises5. Despite government efforts in

Pakistan, SME sector is still credit rationed and

commercial banks seem to prefer corporate sector

for lending. In the year 2004, the share of SME

sector in total credit declined to 18 percent from 19

percent because of relatively faster increase in

financing to the corporate and consumer sectors6.

A score of reasons are put forward as to why

SMEs are not considered preferred sector by

commercial banks for advancing loans:-

* SMEs are unable to provide adequate

collateral/tangible security to banks for availing

any financing facility. This inability of SMEs

deprive them from obtaining loan and expand

their businesses.

* SMEs are mostly undocumented. Banks are

reluctant to finance SMEs because of their lack

of information and high cost involved in

collecting proper information in evaluating the

profitability and riskiness of SMEs.

* SMEs are small borrowers and most of the

banks prefer to deal with few high volume

customers instead of dealing with a small but

large number of customers. Dealing with large

number of small customers results in

appreciation of per transaction cost besides

hiring of large number of staff to handle

volume of transactions. All this translates into

reduction in profit margins of the banks.

* SMEs are hard hit by economic and political

changes in the economy. Any price change or

market swings affect their business to a

considerable extent. Due to this uncertainty as

to the future of SMEs, banks avoid to take

exposure on SMEs.

* Due to regulatory requirements to maintain at

least 8% capital against risk weighted assets,

banks prefer not to give loans to a more risky


* The article is author’s own views and in noway represents official views of National Bank of Pakistan where he works.1 Innovation Leads to Success: Opportunities for Jordanian Women Entrepreneurs by Reem Nejdawi Fariz2 www.smeda.org.pk3 www.smeda.org.pk4 Guarantees and Mutual Guarantees: BEST Report, Report to the Commission by an Independent Expert Group5 Final Report, Asian Development Bank TA 3534-PRC6 Banking Sector Review for the year ended December 31, 2004

SME sector. This capital constraint can be a

reason for banks not lending to SMEs;

* The risk associated with the high dependence

on one single person (or a small team) is

another reason for not taking exposure on

small SMEs;

Considering above, something needs to be

done to ensure flow of funds to credit rationed

SME sector. Different countries have adopted

different measures to address the issue of least

access of credit to SMEs. One of the solutions is to

provide credit guarantee to the lenders of SMEs.

The advocates of credit guarantee system argue

that the guarantee organizations are better

informed about the risk of the loan than the

lender/commercial bank and are better structured

financially to manage the risks involved.

Guarantee systems play an important role in the

development of economy. As a whole, credit

guarantee systems have facilitated risk taking

decision processes of commercial banks and has

improved SME access to credit.

Credit guarantee will also help commercial

banks extending loans to SME sector. Loan

backed by credit guarantee will be placed in less

risky category and consequently less capital charge

will be required to meet capital adequacy ratio as

prescribed by the Central Bank.

European credit guarantee programmes are

considered as models of successful guarantee

programmes. Almost all West European countries

have guarantee systems. In some countries, these

are quite large and sophisticated systems based on

multi-level mutual models (France and Italy) and

in other countries, they have developed into

guarantee banks (Germany and Austria)7.

One of the studies on European guarantee

funds suggested that the cost per guarantee is quite

high. In the 12 European countries studied, the

total number of guarantees issued in 1993 was

about 43,000 with an average loan size of

$98,000. The largest country in the study,

Germany, originated only 6,400 guaranteed loans

with an average guarantee commitment of

$270,000. Spain originated about 6,500 with the

average guarantee commitment of $48,000;

France reported 2,700 loans whose average

guaranteed amount was about $262,000. The

German scheme requires budget support of about

US$27 million per year or about $4,200 per loan

guaranteed. The cost to the government budget

per loan is about 1.5% of the loan value

guaranteed. Italy has a budget outlay estimated at

US$38 million or about US$40,000 per loan

guaranteed. The relationship between the cost to

the budget per loan and the loan size is 14%. In

the U.K., the budget outlay was at least US$24

million or just over $6,000 per loan. This cost to

the budget is about 13% of the loan size.8

Due to higher cost of credit guarantee scheme,

the official view of German Bundesbank about

credit guarantee is unsupportive. It sees the

German and European schemes as an interest rate

subsidy to small and medium size enterprises for

political purposes and, thus, not a “natural

component of a market economy.”9

In 1994, Japan is estimated to have 52

separate guarantee companies issuing credit

guarantees. These guarantee companies have a

counter-guarantee from a government owned

company for 70% of any losses that the lender

incurs due to failure of a borrower to repay the

loan. This appears to have element of subsidy to

these guarantee issuing companies. In 1994

income of about US$7.8 billion was reported by

guarantee industry in Japan. It included $ 2.2

billion, 28% from guarantee fees. The rest of the

income was generated from investments and other

income. The budget support for credit

programmes in Japan is US$68 million. This is

about 2.5% of the amount of the loans

guaranteed.

In Malaysia, SME loan guarantee programme

is backed by the government. For this, Credit

Guarantee Corporation (CGC) was established in



7 Credit Guarantee: An assessment of the state of knowledge and new avenues of research by Michael Gudger8 Credit Guarantee: An assessment of the state of knowledge and new avenues of research by Michael Gudger9 Bannock, 1995.

1972. Under the auspices of Central bank of the

country a quota system was introduced for

different categories of small borrowers and loans to

them have an artificially low interest rate ceiling.

Later on, General Guarantee Scheme (GGS) was

introduced in 1980 to replace CGC. The Special

Loan Scheme (SLS) was introduced in 1981 and

made over 17,000 guarantees. Finally, the

Principal Guarantee Scheme (PGS) was

introduced in 1989.In Malayia, guarantees were

generally issued without the knowledge of the

borrowers. A survey found that most borrowers

(26 out of 32) were unaware of their existence.

The CGC apparently does not give a very high

priority to paying its claims and this probably

accounts for the declining volume of guarantees in

all three programmes in Malaysia. From 1986 to

1993, the CGC processed 3,563 claims for

Ringgits millions (RM) 36.4 but paid only 1,505

claims totaling only RM 9.3. The remaining was

rejected on technical grounds or withdrawn by

banks.10

Jordan’s experience of credit guarantee

scheme is of considerable interest considering that

it is a developing country like Pakistan. The Jordan

Loan Guarantee Corporation (JLGC) was

established in 1994 with a capital of ten million

dinars and it is a public limited company. It is the

only organization in Jordan that provides loan

guarantees. It is interesting to note that out of 23

shareholders of JLGC, 18 are banks and the

Central Bank of Jordan (CBJ) has major

shareholding (47.75% of the JLGC’s capital).

The procedure adopted in Jordon to ensure

access of credit to SME sector is as follows: the

banks are doing the prime work when an SME

comes for getting loan. The banks assess the credit

needs of the small enterprise and are responsible

for conducting feasibility studies and analysis of

the small enterprises requesting the credit. The

bank also acquires any collateral offered by the

client. Then the bank issues the loan upon the

signed approval of JLGC. The bank is also

responsible for follow up on repayments. In the

case of default, the JLGC pays the percentage of

guarantee to the bank after six months of the

borrower’s failure to pay and after making sure

that the bank exhausted all means to collect its

loan. The SMEs Counseling Services Unit at JLGC

was established in 1997 to support the SMEs

owners and refer them to banks after thorough

investigation about their financial status and cash

flow projections. Furthermore, the Unit studies

applications submitted to them by banks to ensure

the viability of enterprises applying for loans.11

Credit guarantee industry in USA is different

from the state-supported schemes in Europe, Latin

America, Canada, and Asia. It is mostly owned by

private sector and includes companies listed at

stock exchanges. They are selling financial

guarantees for profit. In addition to this volume of

operations of guarantee industry is very large in

USA and the industry is expanding its range of

products and tapping new markets domestically

and abroad. In USA insurance companies issuing

credit guarantees have specialization in issuance of

guarantees and it is either their principal or the

only business. In other countries mostly guarantees

are issued by general insurance companies.

The guarantee industry in the USA is divided

into two basic components: Mortgage Guarantee

Companies, which issue financial guarantees on

individual mortgages, usually for those with less

than 20% equity for a down payment. Bond

Guarantee Companies initially provided protection

to holders of mutual bonds to ensure timely

payment of principal and interest, but now cover a

broad spectrum of non-municipal securitizations

and structured corporate debt. These are the

second component of this industry.12

U.S. mortgage and bond guarantee companies

are growing and their return on equity averages

around 15% per year. They have several

characteristics which are responsible for their

success:

a) These companies require no subsidy, rather

they pay shareholders a return on capital



10 Grahame Boocock and Mohammed Noor Mohammed Shariff, "Loan Guarantee Schemes for SMEs-The Experience in Malaysia," Small EnterpriseDevelopment, Vol. 7, No. 2, June 1996.

11 Innovation Leads to Success: Opportunities for Jordanian Women Entrepreneurs by Reem Nejdawi Fariz12 Credit Guarantee: An assessment of the state of knowledge and new avenues of research by Michael Gudger

invested in the form of dividends and /or

additional stock.

b) Due to their appreciative performance, private

sector is investing in these companies as

almost entire capital of these companies comes

from the private sector.

c) They are involved in mass marketing of their

products and it enables them to issue

guarantees with minimal overhead costs.

d) They have established technical know-how

and set of standards to measure the risk and

set a reasonable price for every credit

guarantee issued.

e) Guarantee companies have established credit

monitoring standards that serve as early

warning signals if quality of guaranteed credit

deteriorates and take preventive measures to

minimize losses.

f) Like commercial banks, they have developed

sophisticated credit evaluation techniques and

credit scoring models.

g) Due to competitive environment, credit

guarantee companies continually innovate,

develop new products to expand their market

shares and generate adequate revenue.

In US model of credit guarantee, guarantee

companies are analyzing a loan applicant for

certain class of customers where banks have little

know-how or where security offered for securing

loan is very weak. The risk is being transferred

from banks to guarantee companies in case of

risky customers (e.g. small SME customers)

Implementation of the U.S. model of credit

guarantee in developing countries would require

the governments to establish a guarantee company

initially with government capital. If the company

proves to be a profitable and viable venture, then

it could be sold to private sector through offering

its shares in the stock market.

In addition to above mentioned state owned

credit guarantee companies as in Europe, Asia, etc

and wholly private sector guarantee organizations

in USA, some NGOs and funds created from aid of

international donors are also providing credit

guarantees for loans given to SMEs. For example,

FUNDES a Swiss-based NGO in 1984 took up

operations to guarantee 50% of SME loan

amounts in Costa Rica and Panama. The

organization later expanded its operations in other

countries as well. In 1995, FUNDES had

guaranteed 2,400 loans totaling US$ 54 million for

more than 1,400 customers. FUNDES concluded

after conducting a review of its operations that as

an institution operating with private donor funds; it

would shift its emphasis to non-financial services,

including training and management consulting for

SMEs.13

ACCION International operating in Latin

American countries created a Bridge Fund in 1984

to enable its affiliates to obtain loans from local

banks by offering credit guarantees as partial

collateral. The Bridge Fund was capitalized with

loans from USAID for US$ 1.0 million in addition

to donations from individuals and institutions.

These funds were deposited in a bank and

invested in bonds, which were used as collateral

for guarantees made under standby letters of credit

issued by Citibank in favor of local banks. These

letters of credit currently support guarantees of 20

to 90% of the loans extended by local banks. Local

banks use the letters of credit as security for loans

to ACCION affiliates which in turn on-lend the

funds to micro borrowers at market rates of

interest. At the end of 1994, the Bridge Fund had

issued US$ 6.25 million in guarantees in nine Latin

American countries: Argentina, Bolivia, Chile,

Colombia, Costa Rica, Ecuador, Mexico,

Paraguay and Peru. ACCION affiliates had issued

a total of 400,000 loans totaling US$ 209.5

million. The assets of the Bridge Fund had grown

significantly to almost US$ 6 million. Repayment

rates were reported to be about 98% and no

claims had been made on the guarantees.14

Michael Gudgar in his research report has

developed a credit guarantee model by

incorporating successful elements of different

credit guarantee schemes prevailing in different



13 Credit Guarantee: An assessment of the state of knowledge and new avenues of research by Michael Gudger14 Credit Guarantee: An assessment of the state of knowledge and new avenues of research by Michael Gudger

countries. His model of credit guarantee scheme is

presented below with slight modifications:-

A special purpose organization (SPO) would

write financial guarantees. SPO would be funded

by grants/loans from international banks like ADB,

World Bank, commercial banks, donors, insurers

and other interested parties. The purpose of the

organization would be to issue financial guarantees

in favour of qualified lenders to ensure credit

access to SMEs.

The guarantee company’s main focus would

be to issue credit guarantees for the SME and

micro sector. However, the company could also

engage in other financial guarantee transactions to

foster development and increase volume of

business. The initial capital for establishing of such

guarantee company could be US dollar 100

million.

The procedure for issuance of guarantee

would be as follows: An SME keen to get loan from

the bank would submit an application to the

guarantee company. The guarantee organization

would conduct an audit/verification of the SME.

This audit would involve financial and market

analysis. If satisfactory, then guarantee

organization would ensure that the applicant had

atleast basic accounting and reporting system in

place and could supply the guarantor with regular

financial reports/information about the entity. With

these safeguards in place, the guarantee

organization would issue an unconditional

guarantee in favour of the bank from which the

SME wants to get loan. The guarantee company

would charge premium on the basis of the risk of

default on the Guarantee. The unconditional

guarantee would then be used to borrow from a

commercial Bank.

Having discussed different credit guarantee

models prevailing in different countries and model

proposed by Michael Gudgar, we can develop a

model of credit guarantee scheme in Pakistan for

ensuring access of credit to SME sector.

1. First of all the government has to identify

priority business areas (e.g. Jewelry, Marble,

etc) within the SME sector which are viable

and having the prospects to grow if given

access to credit. It is preferable that identified

business areas should have the potential to

export. These SME sectors can be identified in

consultation with SMEDA.

2. A credit guarantee fund can be created initially

funded by contribution of capital from the

Government of Pakistan (Ministry of

Commerce or Finance), State Bank of Pakistan

and leading interested commercial banks, as in

the case of Jordan. If credit guarantee scheme

proves to be successful and profitable, then the

fund can be privatized through offering shares

in the stock exchange (as is the case in USA,

credit guarantee organizations are listed on

stock exchange).

3. Initially a flexible quota / limit be prescribed for

all commercial banks. This limit will be the

upper level upto which a commercial bank can

avail credit guarantee from credit guarantee

fund for the loans advanced to the SME sector.

4. An SME applicant from the priority areas

seeking loan/credit will approach any

commercial bank. The commercial bank will

process the loan application and will conduct

credit analysis. This credit analysis will be

aimed to determine the viability of the project

and its potential of growth. If SME despite

having bright prospects is incapable to offer

sufficient security/collateral to the bank, the

case alongwith credit analysis, security position

and credit term and conditions will be referred

to the credit guarantee fund for issuing

guarantee in favour of the commercial bank on

behalf of the SME (of course with a request

from SME on a prescribed format to the credit

guarantee fund to issue credit guarantee in

favour of the bank). The credit guarantee fund

will scrutinize the case. After scrutiny and

safeguarding its interests, the fund will issue

guarantee. The premium/commission on

guarantee will be recovered from the SME

through the commercial bank. After issuance

of guarantee and recovery of premium, the

loan will be sanctioned by the commercial

bank.



5. Monitoring of loan will be prime responsibility

of the commercial bank. However, credit

guarantee fund can audit the loan portfolio of

the commercial banks in whose favour it has

issued guarantees, if so desired.

6. In case of default on the part of SME, the

commercial bank will take all appropriate steps

(to be decided by the commercial bank and

credit guarantee fund) to recover the defaulted

amount. If all measures are exhausted, it will

lodge claim with the credit guarantee fund

within one year (or any earlier date) from the

date of default. The credit guarantee fund after

scrutiny of the claim will pay the claimed

amount as per the terms of the guarantee

within 2 months.




A Survey of InternetBanking Websites ofPakistan

MOHAMMAD MOHSINResearch FellowComsats Institute of Information technologyIslamabad.

Abstract

This study is based on the exploration of

websites of the entire population of banks in

Pakistan. The websites are segregated into two

categories, transactional or informational, based

on the type of service extended at these websites.

Next, considering internet banking as a specific

type of e-commerce activity that requires

transactional websites, we extended an e-

commerce websites evaluation framework on the

websites placed under transactional category. The

framework objectively assesses the features of the

Internet banking websites and characterizes the

functionality of websites as per absence or

presence of certain features. These features are

grouped under seven components namely

Information, Legal Statement, Order, Ease of Use,

Aesthetic Effects, Performance and Others. The

results show that only eight banks in Pakistan

extend internet banking service with varying levels

of functionality as measured with respect to the

above mentioned seven components. Results

provide little support to the general perception that

foreign owned banks demonstrate much higher

website services functionality as only two of the

foreign banks were found to offer transactional

internet banking services. This research has

relevance for all the stakeholders of the banking

industry, however, the banking organizations and

the customers both can directly benefit as they will

have a comparison of existing internet banking

services being offered in the country.

Introduction

The purpose of this paper is to disseminate

information about the degree of World Wide Web

presence of various banks in Pakistan with a

special focus on banks offering Internet enabled

transactional banking services. Internet banking is

a new phenomenon in Pakistan and there is little

or no study that is available to the research

community and the stakeholders of banking

system that assist them in comparing the

performance of banks in terms of website

functionality. We hope that through this study, the

research community and stakeholders of the

banking industry would be better informed about

how far the existing transactional services offered

by the banks in Pakistan meet the requirements

specified by contemporary research findings.

Internet and its applications have a profound

effect on the individual lives as well as on business

processes and structures of many industries in the

developed as well as in developing countries

[Shanthi]. The use of Internet in Pakistan is

progressing beyond its basic role of connecting

and linking the people and communities through

its various world-wide informational and

communication services. Despite low Internet

penetration and e-readiness status (62nd out of 64

countries) at a country level [Economist], some

sophisticated uses of Internet and mobile cellular

technology have already begun in urban

population [Mohsin]. Thus we see that businesses

that consider Internet availability as an opportunity

have started to use Internet and virtual space as a

medium to achieve their business objectives. In

commercial banking sector few individual banks

that are early adopters of technology, have started

to broaden their delivery systems by incorporating

Internet technologies and moving to the e-banking

paradigms. These early adopters expect to gain

advantages of operational and strategic nature

such as of lowering of costs and time and of

gaining customer satisfaction through improved

services[Liao, Crane].. Many of these rewards, as

is the case in business to consumer (B2C) e-

commerce, are dependent partially on the

existence of well designed and well functioning


websites [Lightner] that have an effective user

interface and service functionality. Further, as the

website is the firm's interface with the customer, its

usability is crucial to the success of the venture

[Turban]. Usability is also affected by the quality of

the site and its content [Molla]. The capabilities of

the back end Internet banking solutions acquired

by many of these banks are the same but the

services and functionality offered to customers

through front end, i.e., the website interface, vary.

This study explores the variations in the

functionality and contents of the websites offering

Internet banking services in Pakistan and grades

these services on the basis of absence or presence

of certain features.

The Internet banking simply means using

Internet as a remote delivery channel to have

access to authorized money account and services

from anywhere, anytime and possibly from any

place using any of the intelligent devices

[UNCTAD]. Internet banking provides a "channel

to build, maintain, and develop strategic

relationships through access to a broad array of

products, services and low-cost financial shopping,

rapid response to customer inquiries, and

personalized product-service innovation" [Liao].

In the following pages we present literature

review followed by the comparison of the website

functionality and online services of Pakistani

banks. We hope that this comparison will

scientifically document the current state of Internet

banking in Pakistan.

Literature Review

Internet banking is now an established

phenomenon in the developed world with

Sweden, Singapore, US and Japan leading in the

adoption and penetration rates [Maugis]. Fourteen

percent of the Internet users in Arab countries

where e-banking is available have registered for it

[Krishnan]. A good number of studies exist at

global level where website evaluations have been

carried out from a particular country's perspective

[Wenham, Jasimuddin]. In the context of

Pakistan, a few studies are available that reveal

Internet diffusion and its determinants in society

and specific sectors of economy such as SME

[Mohsin, Siyyal]. However, no authentic study has

been found that sheds light on the status of

Internet banking. The most obvious evaluation on

Internet banking is to classify a site as

informational or transactional [Sathye].

Informational sites keep web presence for the

purposes of product or service marketing or

information dissemination. Transactional sites

involve provision of facilities such as accessing

accounts, funds transfer, and buying financial

products or services online.

More specifically researchers look into the

issues of quality, usability and design of web sites

[Mich ,Turban, Agarwal]. Some other researchers

have considered other dimensions such as

security, reliability, privacy, and aesthetic value

[Zeithalm]. Most of these studies have a customer

centric focus but Pressman's work from the

software engineering's perspective also exists that

advocates other dimensions of functionality,

performance and supportability [Pressman].

The importance of appropriate design of

Internet banking sites is of foremost importance for

promoting the adoption of Internet banking. It has

been reported that poor Website design will result

in the loss of 50 percent of potential repeat visits,

due to an initial negative experience [Cunliffe].

The increase in commerce activity through online

sites has made the design of websites as one of the

critical success factors for e-commerce [Hung]. An

effective evaluation of websites could lead to better

design of electronic systems to meet users' needs

[Rettig].

Evaluation Framework

Prior research categorizes websites broadly as

informational and transactional as shown in Table

1 [Unnithan]. We consider a website as

transactional if it provides online balance enquiry

services to its account holders.

For detailed analysis of e-commerce websites

functionality, researchers have proposed

frameworks [Crane, Chung]. However, these

frameworks are not completely generic to be



applied across all types of e-commerce sites. We

extended a website evaluation framework derived

after modifications in an existing e-commerce

evaluation model named as tailored Hersey's

model [Chung]. The tailored model replaced some

components that were not strictly applicable to the

Internet banking process. We also retained the

names and total number of components evaluated

in the tailored model but incorporated further

modifications to it by expanding the order

component and collapsing the list of elements in

the components of legal statement, performance,

aesthetic effect and others category. These

modifications were derived from other referenced

literature [Singh] and matched well with the

existing functionality offered through banking

websites in Pakistan. Table 2 shows the names of

the components, consitituent elements and the

total number of elements included in a particular

component for evaluation.



Table 1Web site Categorization on the Basis of its Function

Function ExampleInformational Advertising, Product/Service information, Company Used for service/product marketing information, Annual reports and Financial purposes, Dissemination of information performance

TransactionalA site offering alternate delivery channel Opening Accounts, on line Statements,for a typical banking transaction such as Bill Payments, Balance enquiryviewing balance, transferring funds etc.

Table 2List of Components to be Evaluated

S# Components/ Details of Elements Total No. of Type of Service elements

1 Information Company Information, Services Information, Product Information 3

2 Legal Statement Security Policy, Legal Disclaimer 2

3 Order Statement of Account(s), Balance Enquiry, Funds transfer, Bills Payment, Third Party Transfer, Opening accounts, Receive Alerts, Requests & Intimations, Cash Management Online, E-Shopping, Credit Card Payment, Standing Instructions, Loan Applications, Customer Correspondence, Insurance, Mobile Banking, Brokerage, Investments, Online Remittance of Funds, Tax advisory service, Financial Planning, Linking A/Cs Online, Market News Online, Trading Online, Foreign Exch. Trading, Foreign Exch. Rates update, Car Loan Applications, Account and Managers password change facility, Banking procedures Guide, Account/ locker/ loan/ ATM card application submission 30

4 Ease of Use FAQs, Tutorial / Demonstration, Search function Help function. Navigation menu/buttons 5

5 Aesthetic effects Graphics, Animations 2

6 Performance Website response time 1

7 Others Branch Locator functionality, Account blocking facility, Bank policies on loan and other areas, Rewards 4

Methodology and Structure of the Paper

The evaluation of Internet banking websites

was made in the 2nd and 3rd month of the year

2005. Thus the results correspond to the

functionalities of the websites observed during that

period. The list of banks available at website of

State Bank of Pakistan, (http://www.sbp.org.pk/

bpd/2004/List_Domestic_Foreign_Scheduled_

Banks.pdf) was referenced for this survey. Each

individual bank's website was evaluated to identify

the type of service available at the website as per

the classification given in Table 1. The websites

found to be offering transactional services were

further explored for presence or absence of various

service/functionality elements that are grouped

under seven components mentioned in Table 2.

The performance in terms of service functionality

was recorded by marking '1'for presence of

functionality corresponding to that element and 0

for an absence of functionality. All the numbers of

'1's were then added to get the scores for each of

the seven components as well as the collective

score for the overall website. These evaluation

scores were then compared to perform

individual, category wise and sector-wise ranking

of the websites as per classification of the banks

shown in Table 3 and Table 4.

Results and Discussions

The survey results, as shown in Figure 3a on

the next page, reveal that out of forty-nine banking

organizations four of these organizations do not

have their websites. Thirty-seven banks use

Internet as a medium for extending information to

their customers and have informational websites,

and the remaining eight banks exploit Internet to

extend both informational and transactional

services. Table 3 shows the type of Internet

services/functionality offered by the eight different

categories of banks in Pakistan. We rank a banking

category on the basis of the share of its

transactional websites to the total number of banks

falling in that category. Thus the category of

denationalized commercial banks demonstrate

highest website functionality as three of the four

banks of this category offer transactional Internet



Table 3: Category wise Classification of Banks and their Websites' Functionality

S. No Category Type No. of Transactional InformationalBanks Services Services

1 Nationalized Commercial Banks 2 0 22 Denationalized Commercial Banks 4 3 13 Specialized Banks 3 0 24 Provincial Commercial Banks 2 1 15 Foreign Commercial Banks 11 2 96 Development Financial Institutions (DFI's) 6 0 67 Private Commercial Banks 17 1 158 Micro Finance 4 0 1

Table 4Sector-Wise Classification of the Eight Categories of Banks of Pakistan

Abbreviation Banking Sector Banking categories according to No. of Ownership/ Services banks

PSCB Public Sector Nationalized, denationalized and provincial Commercial Banks commercial banks 8

LPB Local Private banks Private sector banks incorporated in Pakistan 17FB Foreign Banks Banks incorporated outside Pakistan 11SB Specialized Banks Specialized banks, Micro finance, DFI's 13

services and the remaining one bank's website

extends informational services. The provincial

commercial banks category is placed second

followed by the foreign commercial banks and the

private commercial banks category. The remaining

categories of banks do not have any of their

websites offering transactional services. A sector-

wise analysis of banking websites based on

Table 4 reveals, as shown in Figure 3b, that all

eight PSCBs have websites with five of these

having informational websites and the remaining

three having transactional websites. Out of the

seventeen LPBs, fourteen of them have

informational and three of them have

transactional websites. The foreign banks (FBs)

sector shows nine of the banks have informational

websites and only two banks have transactional

websites for their operations in Pakistan. The

specialized banking sector has the worst

representation on the world-wide web as out of a

total of thirteen banks only nine have

informational websites with four failing to even

have a web presence. In developed countries we

find that Internet banking has transformed the

banking process and has introduced the concept of

virtual banks. The concept of virtual banks simply

means that any organization having an electronic

payment system in place can take up the role of

traditional banking organization. Thus these

specialized banks need to capitalize on this

opportunity of Internet banking by entering early

into the market, when the competition is still less

and non traditional financial institutes have yet to

ground their steps in the financial banking domain

in Pakistan.

Figure 4 presents the overall standings of the

eight banks, clubbed under their respective

banking sectors Thus we see that in the category of

foreign banks Citibank and Habib Bank AG Zurich

are the only two banks offering Internet banking.

Three Public sector commercial banks (PSCB),

namely Habib Bank Limited (HBL), United Bank

Limited (UBL) and Bank of Punjab (BOP) offer

Internet banking. The rest of the banks of this

sector have informational websites. Similarly three

banks of the LPB's sector have transactional

websites. These banks are MCB, Askari

Commercial Bank (ACB) and Metropolitan Bank

(MB). Of all the eleven foreign banks only two are

offering transactional services in Pakistan. Thus

we see that foreign banks operating in Pakistan

have not yet committed to offer Internet banking to

a large extent. It is also interesting to note here that

almost all of these foreign banks are operating

transactional Internet banking services in other

parts of the world. Perhaps, they either don't

consider the Pakistani market to be ripe for

Internet banking or their branch network in

Pakistan is not electronically ready to extend

Internet banking to their customers and thus their

services are limited to informational category only.

A comparative analysis of individual banking

websites puts Citibank as leading with a gross

score of thirty nine followed by a score of 38 each

by MCB and Habib Bank AG Zurich. The

relatively good performance of Citibank and

Habib Bank AG Zurich may be attributed to their

prior Internet banking experience at global level

particularly in developed countries. MCB although

being a local private bank matches the



Figure 3a: General Scenario of Banking Websites Figure 3b: Sector Wise Presence of BankingWebsites

performance of its competitor foreign banks

perhaps due to its relatively early adoption of

technology and its aggressive deployment to

achieve business goals. Therefore, the score of 38

by MCB is a clear indication that it has exploited

Internet well as a product/service delivery channel.

In the PSCB group, Habib Bank is ahead of the

three banks with a score of 24 followed by UBL

(19) and BOP (11).

Figure 5 provides performance comparison of

the eight banks on the seven individual

components measuring website functionality. We

can see from Figure 5 that all the eight banks

perform equally on the performance component

that is measured by response time. There are little

variations among banking websites on the

components of Information, Legal, and Aesthetics.

The Ease of Use and the Others components show

a slight variation and put some impact on the

overall standings of banking websites. However,

the Order component contains most of the

elements for assessment, therefore, scores

achieved on this component actually make an

overall difference in the ratings of the websites.

Order component contains many of the banking

services that can create a real value addition for

the customer and thus banking organizations

should look for initiating these services.

Conclusions and Future Work

In this paper we have reported results of a

survey conducted to explore the type of services

offered by the entire population of forty nine banks

in Pakistan. The types of services were broadly



Figure 4: Aggregate Evaluation Results of Websites of Banks in Pakistan

Figure 5: Comparison of Internet Banking Functionality

classified into informational and transactional and

the banks found to extend transactional/Internet

banking services were further assessed for

presence or absence of various service elements

grouped into seven categories namely 1)

Information 2) Legal statement 3) Order 4) Ease of

use 5) Aesthetic effects 6) Performance and 7)

Others. Results indicate that Internet banking is in

the nascent stages of growth in Pakistan with only

eight banks providing varied transactional

banking/Internet banking services through their

websites. Internet banks in Pakistan represent

three different banking sectors that differ primarily

in the type of ownership and/or business speciality.

Out of the eight banks providing transactional

banking/Internet banking services through their

websites, three belong to public sector, three to the

local private sector and two are of foreign private

ownership. None of these banks are totally virtual

banks and all are traditional brick and mortar

banks that have ventured to adopt Internet

banking as a supplementary/alternate delivery

channel and not as a substitute delivery channel.

The implications of these results of our survey

can be viewed in several ways by the different

stakeholders. Banking organizations already

offering Internet banking can compare their

services with their competitors and look upon ways

to innovate further by offering new products and

services over the Internet. The banks that have not

already adopted Internet banking but intend to do

so can also use it as a reference benchmark.

Banking sector categorized as Specialized banks

could ponder over the reasons that have prevented

any of these banks to adopt Internet banking.

Likewise the variance of adoption pattern among

three banking sectors PSCB, LPB, and FB suggests

of some underlying reasons for this behavior which

needs to be explored further. Regulators, for

instance, can see what needs to be done in

regulations to encourage more institutions to adopt

Internet banking and what steps are needed to

expand the capacity and access related issues.

Finally, customers could make a more informed

decision regarding the choice of selection of a bank

for Internet banking.

This study has some limitations. For instance,

the transactional functions and services reported to

be available from a website are mostly based on

the information available at the website and not by

personally experiencing it. This limitation arose

because the researchers did not have Internet

accounts in all banks that were found to offer

Internet banking. Thus the study can be enriched

further by obtaining information and feedback

from the existing users of Internet banking in

Pakistan to find out whether the banks that score

high on website functionality evaluation in practice

also offer the same level of functionality. Likewise

an enquiry can be made regarding the perceptions

of the customers about the quality of services

offered through Internet banking services.

ACKNOWLEDGEMENT

The article was co-authored by Mr. A.F.M. Ishaq

and Ms. Romana Aziz of COMSATs Institute of

Information Technology, Islamabad and Mr. Kazi

Abdul Muktadir of NIBAF, Islamabad. The authors

acknowledge the enabling role of the Higher

Education Commission, Islamabad, Pakistan and

appreciate its financial support through

“Development of S&T Manpower through

Indigenous PhD (300 Scholars)” for conducting

this research work.

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among different telecom market structures",

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Information Technology, Dubai - UAE, Oct. 4-

6, 2004. pp. 73-82

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"Evaluating and designing Web site quality"

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Engineering - A Practioner's Approach- 4th

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'Beyond Cool': Reviewing Webresources"

Online, Vol 23 No 4 pp 51-55

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Evaluation of e-Business in Australia, Online

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Chattel Fitted To Earth orBuilding – Whether or NotExempt From Attachment

PROF. SYED SABIR ALI JAFFERYEx-Director General (Training & Statistics)Allied Bank LimitedKarachi

Whether a chattel fitted to earth or to a

building is immovable property or not, and

therefore could or could not be attached along

with the land and the building to which it is fitted,

being a mixed question of law and fact, has been

of lively interest to the bankers all over these clays.

There are the following three leading cases on

this issue --- reproduced from “Legal Decisions

Affecting Bankers”, by N. K. Randeria, Legal

Advisor, State Bank of India, Bombay – which

provide purposeful guidance to the bankers

handling credit operations, and may be of lasting

interest to the young bankers desirous to acquire

indepth knowledge of this important area of

banking activity.

1. Perumal Naicker (Appellant) v.

T. Ramaswami and Another (Respondent)

AIR 1969 Madras 346

2. Arumugha Gounder and Others (Petitioners) v.

K. Morappa Gounder (Respondent)

AIR 1973 Madras 46

3. Narsingh v. Kamandas and Another

AIR 1980 Madhya Pradesh 37

Perumal Naicker (Appellant) Versus

T. Ramaswami and Another (Respondent)

The first respondent having defaulted to repay

a loan, the oil engine and the pump set which he

had purchased of the loan, were attached in the

recovery suit, and sold. The appellant being the

purchaser was made a party to the suit filed for

setting aside the sale on the grounds, among

others, that the oil engine, being a permanent

fixture to the land, was immovable property, and

that the procedure applicable to such property not

having been followed, the sale was invalid and bad

in law, and was therefore needed to be quashed.

Lower courts differed in their views. Ultimately,

in a Letters Patent Appeal filed before the Madras

High Court, their lordships Mr. Justice Veeraswami

and Mr. Justice Ramaprasada, while holding that

the oil engine was movable property, laid down

the following guiding principles to determine the

status of such attachments.

“(i) whether a chattel attached to the earth or to a

building is immovable property or not, is a

mixed question of law and fact;

“(ii) certain general tests pointed out by judicial

decisions, such as degree, manner, extent and

strength of the attachment of the chattel to the

earth or building, may be borne in mind;

“(iii) for a chattel to become immovable property

and to be regarded as such, it must become

attached to the immovable property, as

permanently as a building or tree is attached to

the earth;

“(iv) the attachment of the oil engine to the earth

is for the beneficial enjoyment of the engine

itself, since in order to use the engine, one has

to attach it to the earth, and the attachment

lasts only as long as the engine is used. When

it is not used, it can be detached and shifted

elsewhere. Such attachment does not make

the engine part of land and immovable

property;

“(v)Even if the oil engine is mounted on a cement

base and fastened to it by bolts and nuts, it is

not possible to regard the oil engine as

immovable property, merely because for

beneficial enjoyment of it, and during its use, it

is fixed to the earth in that manner. It cannot


Legal Decisions Affecting Bankers

be said that the intention is to make it a

permanent part of the earth.”

Arumugha Gounder and Others (Petitioners) v.

K. Morappa Gounder (Respondent)

The issue in this revision petition was with

regard to the exemption from attachment of an oil

engine fitted to a well.

The petitioner in a recovery suit for the amount

owed by the respondent had submitted a petition

for attachment before judgment of the oil engine

fitted to the well, on the plea that the respondent,

who was otherwise heavily indebted, was trying to

sell that engine.

The respondent contested the petition on the

ground that, since the oil engine was an

agricultural implement, it fell beyond the scope of

attachment.

The court of the initial jurisdiction dismissed

the petition holding the view that the oil engine

was not permanently fixed to the earth, and that it

was exempt from attachment under section 60(1 )

(b) of the Code of Civil Procedure.

Aggrieved by the judgment of' the trial court,

the petitioner approached the Madras High Court

with the contention that the oil engine was not a

tool of an artisan or an implement of husbandry,

and was therefore not exempt from attachment.

The High Court before arriving at its final

verdict referred to the three earlier judgments of

Sind, Allahabad, and Madhya Pradesh High

Courts.

In Udharam Dalumal v. Rozi Shambe (AIR

1939, Sind 96), it was held that the term

“implement husbandry” be interpreted in a ‘fair

and reasonable manner' and with a ‘generous

spirit', and as a water pumping engine was

necessary to irrigate and cultivate, it was not

attachable.

In Dwarka Prasad vs. Municipal Board, Meerut

(AIR 1958 All. 561) it was held that a tractor,

being an agricultural implement, was exempt from

attachment, and that there was nothing in Section

60 (1 ) (b) to restrict its application to small

farmers.

A contrary view was taken in Mathrabai versus

Kanhhaiyalal (AIR 1969, Madhya Pradesh 375)

wherein the Division Bench had observed that an

implement of husbandry which could be exempted

be such as would be indispensable to an

agriculturist, and with which he could earn a

livelihood. All internal combustion engine used for

working as a water pump was not indispensable

for agriculture although the same would enable the

agriculturist to irrigate his land conveniently and

quickly. Hence, it was held the engine was not an

agricultural implement.

After referring to all the three judgments of the

High Courts of Sind, Allahabad, and Madhya

Pradesh, this Honorable High Court, subscribing

to the views of the Madhya Pradesh High Court,

held that the disputed oil engine was not an

implement of husbandry, even if it was used for

pumping out water from the well to cultivate lands.

The following observations of' the Madras

High Court, on the basis of which it adjudged that

the oil engine was not exempt from attachment,

are a meaningful addition to the case law.

“The principle underlying the exemption is that

artisans who depend for their livelihood on the

tools which they possess or the implements of

husbandry which they as agriculturists require to

earn their livelihood should alone be exempted

from attachment. The word ‘livelihood' connotes

the idea of means of living or sustenance and an

oil engine used as a quick mode of drawing water

from a well is not indispensable to an agriculturist

to cultivate his lands. No doubt, such mechanical

appliances may enable an agriculturist to irrigate

his lands quickly and draw more water to irrigate

his fields. But on this score, it cannot be said that

an oil engine is indispensable for an agriculturist.”

Narsingh vs. Kamandas and Another

The issue in dispute was whether an electric



motor pump fitted to well for irrigating an

agricultural field was an implement of husbandry

and was therefore exempt from attachment and

sale in execution of a decree against the

agriculturist.

In execution proceedings initiated against the

judgment debtor - agriculturist, an electric motor

pump fitted in his well situated on his agricultural

field was attached by the executing court on the

application of the judgment creditor. The

judgment debtor contested the attachment on the

plea that he was an agriculturist and the electric

motor pump was an implement of husbandry

which was necessary for him to carry on

agricultural operation and earn him a livelihood,

and therefore was exempt from attachment under

section 60 (1) (b) of the Code of Civil Procedure.

The Full Bench of' the High Court, rejecting

the judgment of its own Division Bench in

Mathurabai vs. Kanialal (AIR 1969, Madhya

Pradesh 375), held that the pump in question was

an implement of husbandry, and could not

therefore be subjected to attachment.

Earlier, in Appasaheb versus Bhalchandra (AIR

1961, Supreme Court 589), the Honorable Apex

Court had held that the implements of husbandry

would mean and include the implements with

which an agriculturist would till the soil, which

were exempt from attachment.

His lordship Mr. Justice U. N. Bhachawat of

the Full Bench of the Madhya Pradesh High Court,

overruling the contention of its Division Bench in

Mathurabai case that the electric motor pump was

not an implement of husbandry as it was not an

implement with which the agriculturist would till

the soil, and furthering the observations of' the

Supreme Court in Appasaheb case, placed

“cumulative meaning” on the words ‘Till',

‘Husbandry', and 'Implement', according to which

the implement of' husbandry would mean the

apparatus, instruments and other implements used

for the purposes of farming or cultivation or for

agricultural operation. Irrigation of fields, His

Lordship asserted, was absolutely essential for

better cultivation and, therefore, it could well be

said that the electric motor pump, which was an

instrument or an apparatus for pumping out the

water for irrigating, was an implement of husbandry.

The learned judge further observed that the

definition offered by the Code of Civil Procedure

(Amendment) Act, 1976, had widened the meaning

of the term ‘agriculturist' so as to include the person

who neither cultivated himself nor supervised the

cultivation carried on by his servants or labourers

or the members of his family, provided he

depended for his livelihood mainly on the income

from agricultural land. The argument, therefore, that

only those implements which were used by

agriculturists in ploughing the land would be the

implements of husbandry was found ‘difficult to accept'.

In the wake of these conflicting views,

summarized below in tabular form, on an issue of

lasting interest in a predominately agricultural

country, a more specific law is probably needed.



Subject Matter Case Law Held

Water pumping engine Udharam Dalumal case Was necessary to irri-

AIR 1939, Sind 96 -gate and cultivate;

hence, not attachable.

Tractor Dwarka Prasad case Being an agricultural

AIR 1958 All. 561 implement, it was ex-

empt from attachment

Implements of husbandry Appasaheb case The term would mean

AIR 1961, Supreme implements with which

Court 589 agriculturist would till

the soil, and these were

saved from attachment.



Water pumping oil engine Mathrabai case Was not an implement

AIR 1969, of husbandry; hence

Madhya Pradesh, 375 attachable

Oil engine attached to earth Perumal Naicker Was movable property;

AIR 1969, Madras 346 hence attachable.

Oil engine filled to well Arumugha Gounder Was not an implement

AIR 1973, Madras 46 of husbandry; hence

attachable.

Electric motor pump Narsingh case Was an implement of

fitted to well AIR 1980 husbandry; hence

Madhya Pradesh 37 exempt from

attachment.


PROF. SYED SABIR A. JAFFERYEx-Director General(Training & Statistics)Allied Bank LimitedKarachi

QUESTIONS

One Mr. Waqas Qureshi has e-mailed the

following queries.

1. Can a open and bearer cheque in which

payee’s name is M/s Asghar Book Depot or M/s Ali

& Co. be paid in cash over counter?

What kind of discharge is required for payment

of cheque in cash over counter?

2. Can a cheque generally crossed (i.e. having

two transverse lines without words payee’s a/c

only) in the name of any person be received for

collection in account of some other person? What

type of endorsement will be required in this case?

And if a generally crossed cheque is, say in the

name of X and endorsed in favor of Y by X, what

will be the responsibility of collecting banker? Can

it be received for collection in account of Y?

3. Person A approaches the branch for

issuance of DD in the name of X and DD is

accordingly issued. The next day, A approaches

the branch and declares that DD issued in favor of

X has been lost. The branch immediately informs

the drawee branch and requests for marking

caution for stop payment. After one or two days, X

comes in the drawee branch (X is already

maintaining account at branch) and presents the

same DD and asks for credit of its proceeds in his

account being maintained with them. The branch

record shows that the DD has been reported lost

by the purchaser. How the drawee branch should

tackle X and what steps should a banker take at this

moment?

ANSWERS

Question # 1

1.1 The question invokes sections 47, 58, 9, 118,

and 10 of the Negotiable Instruments Act.

1.2 Under Section 47, a bearer cheque is negotiable

by mere delivery. Moreover, an open cheque

has to be paid on demand. Hence, a bearer

and open cheque, if otherwise in order, can be

paid in cash over the counter.

1.3 Under Sec. 58, when the cheque is lost or

obtained by means of an offence, or for an

unlawful consideration, the possessor is not

entitled to receive the amount due thereon

unless he, or the person through whom he

claims, was a holder in due course.

1.4 As stated in Sec. 9, a person who for

consideration becomes the possessor of a

bearer cheque, before it became overdue, and

without notice that the title of the person from

whom he derived his own title was defective is

holder in due course.

1.5 Consideration required of a holder in due

course is presumed to exist under Section 118

of the Act until contrary is proved.

1.6 Examination of the cheque by naked eye will

show whether or not it was stale. Here it is

presumed that date-wise the cheque was in

order.

1.7 A banker is not supposed to probe into the title

of the presenter of each cheque presented to it

for payment. In order to get legal protection, it

has only to meet the requirements of payment

in due course as enunciated in Section 10.

1.8 Assuming that the requirements of' Sec. 10

(enumerated in the following paragraph) are

duly met, the payment of the cheque in question

can be safely made in cash over the counter.


Questions and Answers on Practice and Law of Banking

1.9 Pre-requisites of payment in due course are:

1.9.1 According to the apparent tenor of the

instrument. This condition seems to

have been fulfilled, particularly in

regard to a bearer cheque.

1.9.2 In good faith and without negligence-

Apparently there is no reason why these

should not be considered to have been

met.

1.9.3 Under circumstances which do not

afford a reasonable ground for

believing that the person in possession

of' the cheque is not entitled to receive

payment.

1.10 There is no set criterion to evaluate the

circumstances in which a cheque is presented

for payment. This has to be made on case-to-

case basis. For example, a bearer and open

cheque drawn in favor of a limited company

shall not be paid over the counter. The

reason for this is that according to the

established practice, no limited company

shall ever need to have a cheque drawn in its

favor paid in cash over the counter.

Invariably, it will be deposited into the

account of the company. Hence, any such

cheque presented at the counter demanding

cash payment shall “afford a reasonable

ground for believing that the person

presenting the cheque is not entitled to

receive the payment”.

1.11 There are two payees of the cheque in

alternative. Payment can be made to either

of them, or to the bearer of the cheque.

1.12 Finally, in view of what has been stated

above, payment of the cheque in question

can be made in cash over the counter.

1.13 The second part of the question is also

addressed by Sec. 47 of the NIA referred to

above in step 1.2. Being a bearer cheque, it

does not legally require any 'discharge'.

However, the practice demands that the

presenter should write his name as a token of

having received the money, otherwise the

bank might ask for tendering a stamped

receipt before affecting payment.

Question # 2

2.1 The very opening sentence of the question

reading “Can a cheque generally crossed in

the name of any person be received for

collection in account of some other person” is

incorrect and confusing. It should be noted

once for all that crossing is never made in the

name of any person; special crossing to a bank

excepted. The question, if reworded so as to

read “Can a generally crossed cheque drawn

payable to a certain person be collected in the

account of some other person?” would carry

some sense. Its answer will be as under:

2.2 Payment of a cheque crossed generally shall

not be paid otherwise than to a bank. Any

crossing, except the ‘account payee' crossing,

has nothing to do as to for whom a cheque is

being collected. It is the nature of the cheque

as ‘bearer' or ‘order' that concerns.

2.3 A generally crossed cheque, if bearer in nature,

may be collected for the account of the payee

named thereon, or for any other account

without needing any endorsement.

2.4 If the cheque is an order cheque, and crossed

generally, then also it may be collected for the

account of the payee, or for any other account,

if bearing blank endorsement by the payee, or

for the account of the endorsee in whose favor

it has been endorsed ‘in full'.

2.5 Following illustrations would further clarify the

issue.

Bearer cheque, crossed generally, and drawn

payable to ‘X'.

2.5.1 This cheque may be collected for ‘X',

‘Y', ‘Z', and so on, requiring neither any

endorsement by any one, nor any

discharge by the collecting bank.



Order cheque, crossed generally, drawn payable to

X, bearing X’s blank endorsement

2.5.2 This cheque may be collected for the

account of ‘X', ‘Y', ‘Z', or so on. In this

situation, the collecting bank may

require Y or Z. (for whom the cheque is

being collected) also to write its name as

second payee. Then, it will give a

discharge reading, “1st payee's

endorsement confirmed; 2nd payee's

account will be credited on realization”.

Order cheque, crossed generally, drawn payable to

‘X', endorsed by 'X' in favor of 'Y'

2.5.3 This is the case of ‘endorsement in full'

in favor of ‘Y'. ‘Y’ will be required to put

his blank endorsement, and then the

cheque will be collected for the account

of ‘Y'. The collecting bank's discharge

shall be the same as in the preceding

example.

COLLECTING BANK'S LIABILITY

2.6 The collecting bank is discharged of its liability

if the requirements of Section 131 of the

Negotiable Instruments Act are duly met.

These are as under:

2.6.1 The banker while collecting the cheque

acts in good faith.

2.6.2 The banker while collecting the cheque

acts without negligence.

2.6.3 The banker collects for its customer.

2.6.4. The cheque while being received for

collection is crossed either generally or

specially to the collecting bank.

Question # 3

3.1 Section 85-A, subsequently added to the

Negotiable Instruments Act in 1930, affords

protection to the paying bank as regards

payment of drafts. It says that where any draft

purports to be endorsed by or on behalf of the

payee, the bank is discharged by payment in

due course.

3.2 The requirements of payment in due course

are enumerated above under step 1.9. In the

given situation, the requirement listed against

step 1.9.3 concerns most. Since the payee of

the draft maintains an account with the drawee

branch, ordinarily there should not be much

difficulty in ascertaining the validity of his title

to the proceeds of the draft.

Hence, the draft should be paid under

intimation to the drawing branch. At the most,

if the amount is considerably large, an

indemnity may be obtained from the payee.

3.3 This should also be borne in mind that

payment of a bank draft cannot be refused

without there being sufficient reasons to

substantiate the bank's action. Marking of

caution against its payment simply aims at

alerting the banker to be more vigilant as

regards the requirements of payment in due

course. However, if the bank has sufficient

grounds to believe that the person claiming the

payment is not entitled to receive it, it can

return the draft with remarks, “draft reported

lost”.





LAHORE

ChairmanMr. Barbruce IshaqChief ManagerState Bank of PakistanPh: 9210452, 9210479Fax: 9210440, 9210471

Mr. Masood AzizOfficer InchargeUAN: 111-111-564Ph: 9210479 Fax: 9210471E-mail: [email protected]

RAWALPINDI

ChairmanMr. Taslim KaziChief MangerState Bank of Pakistan (BSC-Bank)Ph: 9270751, 9272529Fax: 9272529

Mr. Shahid Hamid QureshiOfficer InchargeUAN: 111-111-564Ph: 9272529Fax: 9272529E-mail: [email protected]

ISLAMABAD

ChairmanMr. Muhammad Sohrab AbbasiChief MangerState Bank of Pakistan (BSC-Bank)Ph: 051-9201715Fax: 051-9204991

Mr. Irfan Ahmed KhanOfficer InchargePh: 051-9204611E-mail: [email protected]

PESHAWAR

ChairmanMr. Muhammad Humayun KhanChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 9211975, 9211986Fax: 9211963

Mr. Kamran Ahmed KhanOfficer InchargeUAN: 111-111-564Ph: (091) 9213616 Fax: (091) 9213616E-mail: [email protected]

FAISALABAD

Chairman

Mr. Mahmood-ul-HasanChief ManagerState Bank of Pakistan (BSC-Bank)Ph: (041) 9200444, 9200421-30 Ext.234Fax: (041) 9200412

Honorary Secretary

Mr. Hussain KhanAsstt. Chief ManagerState Bank of Pakistan (BSC-Bank)Ph: 041-9200421-29, 041-9200881Fax: 041-9200412E-mail: [email protected]

MULTAN

ChairmanMr. Akbar AliChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 9201088Fax: 9200591Honorary SecretaryMr. Hafiz Imran Ahmad AbdullahState Bank of Pakistan (BSC-Bank)Ph: 9200581 - 90, 9200592, 9200595Fax: 9200591

SUKKUR

ChairmanMr. Ghulam Muhammad PhulChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 071-9310260-61Fax: 071-9310259 Honorary SecretaryMr. Saifullah SalimAssistant Chief ManagerState Bank of Pakistan (BSC-Bank)Ph: 071-9310261Fax: 071-9310259

HYDERABAD

ChairmanMr. Sher Alam KhanChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 022-3200605Fax: 022-9200604 Honorary SecretaryMr. Abrar HussainDy. Chief ManagerState Bank of Pakistan (BSC-Bank)Ph: 9200605, 9200606, 9200501-6Fax: 9200604

QUETTA

ChairmanMr. Tanveer-ul-IslamChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 081-920286, 9202029, 2822164Fax: 081-9201518, 2822164Officer InchargeMr. Waheed Ahmed KhanAssistant Chief ManagerUAN: 111-111-564Ph: 081-2822164 Fax: 081-2822164

MUZAFFARABAD

ChairmanMr. A.D. ButtChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 058810-32004Fax: 058810-32003Honorary SecretaryMr. Syed Asad Abbas ZaidiAssistant Chief ManagerState Bank of Pakistan (BSC-Bank)Ph: 058810-32004

Local Centres of the Institute of Bankers Pakistan



SIALKOT

ChairmanMr. Saeed HasanChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 0432-9250351, 9250355Fax: 0432-9250353

Honorary SecretaryMr. Muhammad BootaAssistant Chief ManagerState Bank of Pakistan (BSC-Bank)Ph: 0432-9250351-9250355

BAHAWALPURChief CoordinatorMr. Muhammad Hashim MirjatChief ManagerState Bank of Pakistan SBP BSC (Bank)Ph: (0621) 9255038 Fax: (0621) 9255037Coordinating OfficerMr. Salamuddin AlviState Bank of Pakistan (BSC-Bank)Ph: (0621) 9255038 Fax: (0621) 9255037

GUJRANWALAChief CoordinatorMr. Muhammad Munir AhmedChief ManagerState Bank of Pakistan SBP BSC (Bank)Ph: (055) 9200310 Fax: (055)9200309Coordinating OfficerMr. Muhammad Sharif KhanState Bank of Pakistan (SBP-BSC Bank)Ph: (055) 9200310 Fax: (055) 9200309

D.I. KHANChief CoordinatorMr. Muhammad Rauf KhanChief ManagerState Bank of Pakistan SBP BSC (Bank)Ph: (0966) 9280043 Fax: (0966) 9280044Coordinating OfficerMr. Mohammad IshaqState Bank of Pakistan SBP BSC (Bank)Ph: (0966) 9280043 Fax: (0966) 9280044

KARACHI (NAZIMABAD BRANCH) Chief CoordinatorMr. Muhammad Yamin KhanChief ManagerState Bank of Pakistan (BSC-Bank)Ph: 9260702 Fax: 9260712Coordinating OfficerMr. Syed Mahboob HassanState Bank of Pakistan (BSC-Bank)Ph: 9260705-9 Fax: 9260712

LARKANAChief Co-ordinatorMr. Dhani Bakhsh BaloachSVP/Regional Business ChiefNational Bank of Pakistan, Regional Headquarters, Ph: (074) 9410867, 9410823 Fax: (074) 9410868Coordinating OfficerMr. Qurban Ali KunbharNational Bank of Pakistan, Regional Headquarters, Ph: (074) 9410867, 9410823 Fax: (074) 9410868

MIRPUR (A.K.)Chief Co-ordinatorMr. Mushtaq Ahmad AwanRegional Operation ChiefNational Bank of PakistanRegional Office, Bank SquarePh: (058610) 42547 Fax: (058610) 46007E-mail:

Coordinating OfficerMr. Muhammad Salim Ch.Coordinating OfficerNational Bank of PakistanRegional Office, Bank SquarePh: (058610) 42547 Fax: (058610) 46007

RAHIM YAR KHANChief CoordinatorMr. Nasir Masood MalikManager National Bank of PakistanMain Branch, Model Town,Ph: (068) 9230184-86 Fax: (068) 9230187

GUJRATChief CoordinatorMr. Iftikher Ahmed ChaudhryRegional Operation ChiefNational Bank of PakistanPh: (053) 9260150-2 & 92060153-4 Fax: (053) 9260151

ABBOTTABAD

Chief Co-ordinatorMr. Sardar Alam KhanRegional Operations ChiefNational Bank of PakistanRegional Office, Circular Road,Ph: (0992) 9310144 Fax: (0992) 9310318

SAHIWALChief Co-ordinatorMr. Khalid Jameel Siddiqui National Bank of PakistanRegional Office, Ph: (0441) 65216 Fax: (0441) 65217

GILGITChief Co-ordinatorMr. Malik Mohammad Issa KhanRegional Operation ChiefNational Bank of PakistanRegional Head Quarter, (North Avenue)Ph: (05811) - 52565, 50385 Fax: (05811) - 52655

MARDAN

Chief Co-ordinatorMr. Sardar Alam KhanRegional Operations ChiefNational Bank of PakistanRegional Office, Bank Road,Ph: (0937) 9230328 Fax: (0937) 9230057

NAWABSHAH

Chief CoordinatorMr. Haji Anwar BalochManager National Bank of PakistanMain Branch, Main Bazar,Ph: (0244) 9370401 - 2 Fax: (0244) 9370403

MINGORA (SWAT)

Chief CoordinatorMr. Anjum KhanManager National Bank of PakistanMain Branch, Bank Square, Ph: (0936) 9240035-37 Fax: (0936) 9240036

KHUZDAR

Chief Co-ordinatorDr. Habib AliManager National Bank of PakistanMain Branch,Ph: (0848) 412518 Fax: (0848) 412811

Coordinating Offices of the Institute of Bankers Pakistan



USAMr. M. Rafiq Bengali,SEVP & Regional Chief Executive,National Bank of Pakistan,Regional Office, New York,100 Wall Street,P.O. Box 500,New York, N.Y. 10005,Fax # 1-212-3448826

CANADAMr. Rasool Ahmed Kaleemi,SEVP/Chief Representative,National Bank of Pakistan,Representative Office, Toronto (Canada),175 Commerce Valley Drive West,Suite 210, Thornhill, Ontario L3T 7P6,Fax # 1-9057071040

UNITED KINGDOMMr. Abid H. Mufti,Chief Executive Officer,United National Bank,2 Brook Street,London W1S 1BQ,Fax # 44-207-2904950

FRANCEMr. Nausherwan Adil,Regional Chief Executive,National Bank of Pakistan,Regional Office, Paris (France) 90, Avenue Des Champs Elysees 75008, ParisFax # 33-145636604

GERMANYMr. Amjad Hamid,General Manager,National Bank of Pakistan,Holzgraben 31,Fillale Frankfurt/Framlfirt Nramcj,60313 Frankfurt am Main,P.O. Box 101643 Germany,Tel # 49-69-975712Fax # 49-69-748151

BELGIUMMr. Asad Ansari,EVP & General Manager,Habib Bank Limited,19, RUE-DE-LOI 1040,Brussels,Granite House,Fax # 322-2804651

JAPANMr. Chaudhry Muhammad Rafique,EVP/General Manager,National Bank of Pakistan,CJ Bldg, 3rd Floor,Nishi Shimbashi 2-7-4,Minato-ku,Tokyo 105-0003,Tel # 81-3-3502-0331Fax # 81-3-3502-0359

AFGHANISTAN.Mr. Syed Mahmood-ul-Hassan,General Manager,National Bank of Pakistan, Kabul Branch, House No. 2, St. No. 10,Wazir Akbar Khan, Kabul, AFGHANISTAN.Fax # 93-20-2301659

BANGLADESHMr. Q.S.M. Jehanzeb,General Manager,National Bank of Pakistan,Dhaka Branch,79, Motijheel Commercial Area,Dhaka-1000,Tel # 880-2-9560248-9Fax # 880-2-9560247

NEPALMr. M. Fahim Butt,SVP & General Manager,Himalayan Bank Limited,Karamcharia Sanncharya,Kosh Building, Tridevi Marg, Thamel, GPO Box 20590 KTM,Kathmandu, NEPAL.

EGYPTMr. Mujahid Abbas Khan,General Manager,National Bank of Pakistan, Cairo Branch74, Gameat Al-Dawal, Al-Arabia Street, 3rd Floor, Mohandessen, Giza,

MAURITIUSMr. Abdul Razzak Kapadia,Senior Vice President & Country Manager,Habib Bank Limited,Sir William Newton Street, P.O. Box 505, Port Louis,MAURITIUS.Tel: (230) 208 0848

(230) 208 5524Fax: (230) 212 3829

KENYAMr. Hamid Mukarrum Baig EVP & Regional General Manager,Habib Bank Limited,Exchange Building,Koinange Street,P.O. Box 43157-00100, NairobiTel # 020-246613/41Fax # 020-214636

KAZAKHISTANMr. Syed Azhar Ali,General Manager,National Bank of Pakistan,Subsidiary Almaty, Hotel Complex "OTRAR", 73 Gogal Street, AlmatyKAZAKHSTAN.

HONG KONGMr. Asif Hassan,SEVP/Regional Chief Executive,National Bank of Pakistan,Regional Office Hong Kong,Unit 1801-1805, 18th Floor,ING TOWER, 308-320,DES VOEUX Road Central,Hong KongTel # 852-2851-4292Fax # 852-2139-0298

SINGAPOREMr. Ashraf M. Wathra,EVP & Regional General Manager,Asia Pacific Region,Habib Bank Limited,No. 3, Phillip Street # 01-04,Commercial Point,SingaporeFax # 65-64380644

U.A.E.Mr. Wajahat Husain,Head of Middle East,United Bank Limited,Khalid Bin Waleed Street,Bank Street Building, P.O. Box 1367, Dubai.Fax # 97-14-3523560

KINGDOM OF BAHRAINMr. Zubair Ahmed,EVP/Regional Chief ExecutiveNational Bank of Pakistan, Regional Office Bahrain,9, Manama Center, Government Avenue,P.O. Box 775. Manama,Tel # 97-17224191Fax # 97-17224411

SULTANATE OF OMANMr. Jawed Z. Karim,EVP& Country Manager,Habib Bank Limited, Regional Office, MBD Area, Qurrum House, P.O. Box 1326, Ruwi, Postal Code 112,Tel # 00968-24817163Fax # 7715809

IRANMr. S. Anwar Saeed,EVP & General Manager,Habib Bank Limited,Koye Nasr (Geesha) Building No. 170/4,2nd Floor, P.O. Box 14395-739, Tehran, Fax # 98-218273900

Overseas Co-ordinating Offices of the Institute of Bankers Pakistan



Articles for IBP Journal

The ability to think and think straight is not a close preserve of some selected

individuals or groups of individuals. A creative brain-wave or an original idea

leading to useful suggestions or correct assessment of an important problem,

hitherto unidentified, with or without a corresponding solution, may come up to

anyone, anywhere, anytime. If you are imbued with an urge to write and wield a

facile pen, you are invited to try it by writing articles for the Institute’s journal,

either in English or in Urdu. Some of the topics for writing articles on them are

given below:

1. Bank Profitability in the Post - Privatization Period

2. Trend in the Banking Spread: Reasons for Decline

3. Improvement in Regulations and Autonomy

4. Shifting to Consumer Finance

5. Financial Sector Reforms Structure

Our deep appreciation and gratitude apart, we pay honorarium of upto

Rs. 6000/- for an article published in the journal, depending on the quality and

length of the article. Kindly send your articles to:

Mr. Jauhar AliDirector (Training & Publications) Institute of Bankers PakistanMoulvi Tamizuddin Khan RoadKarachi – 74200Pakistan.



The Institute of Bankers PakistanPUBLICATIONS ORDER FORM

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Agricultural Credit — Lessons from Experience 100.00

Accounting for Financial Services 200.00

Audit in Banks — Philosophy and Techniques 150.00

Business Communication for Financial Sector 200.00

Bank Lending 150.00

Business Ethics in the Banking Sector 150.00

Challenges for Banking Sector of Pakistanin 21st Century 150.00

Economics 500.00

Field Management in Banks 25.00

Financial Management and Project Appraisal 150.00

Interest-Free Banking 150.00

International Banking 100.00

International Trade, Investment andDebt Management 85.00

Laws Relating to Financial Services 200.00

Legal Decisions Affecting Banks 100.00

Legal Framework for Islamic Banking — Pakistan’s Experience 35.00

Legal Notes on Banking Transactions: Volume-I 100.00

Legal Notes on Banking Transactions: Volume-II 100.00

Management Accounting For Financial Services 250.00

Management of Lease Operations 150.00

Managing Risk in Financial Sector 150.00

Pasban-e-Bankari (Urdu) 40.00

Practice and Law of Banking 100.00

Privatisation and Financial Deregulationin Pakistan 35.00

Strategic Management of Financial Institutions - Survival in 21st century 200.00

Selected Prize Winning Essayson Banking & Finance 200.00



Pakistan—The Economy of an Elitist State(Urdu Version) 500.00

Role of Micro Credit in EconomicRevival and Poverty Alleviation 100.00

Glossary-Banking and Finance 500.00

Glossary-Banking and Finance (Students Edition) 500.00

Anti-Money Laundering Measures-A Guide for Banks. 150.00

Development of Corporate Bond Market in Pakistan:Challenges and Prospects 150.00

Case Studies & Instructor’s Manual (SMEs) 300.00

II. LESSON NOTES

Business Communication Vol-I & II 300.00

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