Ways And Means Of Deposit Mobilization Finance Essay

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In wake of the financial meltdown that started in 2008, financial institutions

were the worst beneficiaries of the global crises. Pakistan also was not

spared and economically suffered a supply shock in the form of all time high

oil prices which took the inflation to its all-time height to 22%. To manage

these shocks Pakistan immediately hurried to IMF for bailout package for

more than 10 billion dollars while SBP played its role by increasing the

discount rate and other statutory requirement to curb the rising inflation

while relaxing the capital requirements for banks.

The aftershocks of the global meltdown in 2010 are still haunting the Banks

in Pakistan, in shape of detoriation of quality loan portfolio. In 2008 alone

the NPL portfolio witnessed an astonishing rise of 64.7% from 218 billion to

359 billion. This increase in portfolio detoriated the banking industry profit

by 107 billion, which was 46 billion in excess of 2007, while in 2009, NPL

portfolio rosed by 20.3%. The second major impact to the banking industry

was the increase in cost of funding which surged from 4.3% in June 07 to

6.2% in June Dec 09 but has come down from 7.2% in March 09.

Surprisingly the spreads didn't shrink by dec 09 and remained stabled at

6.8%. The main reason is that the banks are cutting down the rates on

deposits to maintain the spreads. On one hand the current deposits are

increasing in the industry on the other hand saving deposits are substituting

with fixed deposits which intails increases the cost of funds. This shift in the

deposits is primarily attributed firstly to SBP incentive policy to mobilize

long term deposits through CRR and secondly banks own initiatives to

narrow the mismatch of assets and liabilities. And finally the last but not the

least is SBP initiative to introduce a floor of 5% on saving deposits

beginning June 2008 which increased the cost of funds by 56 bps. In 2010

Pakistan yet again witnessed a new shock in shapes of floods destroying the

70% of agricultural land. The Banking industry is yet to take the impact of

these floods which could actually hit the SME sector in a very terrible

manner, the impact of which would hit the dec 2010 results. The after

shocks of these floods would again trigger the inflation rise to 25% as per

the government statistics while IMF's calls for 22% inflation, which

currently is standing at 13%.

HMB was not the exception to this aftershock phenomenon, but has greatly

managed itself to maintain its profits by efficient management of expenses,

change of leadership and lowering of cost of deposits. Nevertheless, the

rising inflation would again bring in the new economic crises, which would

take banking industry towards a point of saturation in terms of deposits and

its cost while profits of the industry would be snatched by the rising NPL

portfolio. The need is to gather the low cost deposits especially the current

and saving deposits, for which there is a dire need to look for segments of

customers which could provide such deposits, a white space in the

economy.

This paper is about highlighting the white space within the downfall

economy, for the banking industry and for my bank HMB. Through this

paper I would try to identify the underserved segments through which HMB

could benefit from it and in turn lower its cost of funds. The paper would

highlight the problem as to why there is a need for HMB to get the deposits

from unserved segments. Secondly identification of such segments through

secondary research data and finally the conclusion.

OVERVIEW OF HABIB METROPOLITON BANK (HMB)

Habib Metropolitan Bank Limited (HMB) was incorporated in Pakistan as a

public listed company in 1992 under the name, Metropolitan Bank Limited.

The bank commenced full scheduled commercial banking operations in

October 1992. Metropolitan Bank, from October 1992 to September 2006,

remained a highly rated bank and with its nationwide 51-branch on-line

network, established as a distinguished provider of trade finance services.

On October 26, 2006 Habib Bank AG Zurich's Pakistan operations merged

into Metropolitan Bank Limited and the merged entity was named Habib

Metropolitan Bank Limited (HMB). Demonstrating a strong commitment to

Pakistan's economy, HBZ is the principal shareholder of HMB.

HMB operates in all major cities of the country. The bank ranks within top

10 in Pakistan with a strong vision to be the most reliable financial

institution. HMB has its primary focus on retail banking and trade-finance

and also offers highly innovative e-banking. The group's flagship and HMB's

principal, HBZ (incorporated 1967) enjoys international ranking of 687 in

terms of capital. With headquartered in Switzerland, the HBZ Group also

operates in Hong Kong, Singapore, United Arab Emirates, Kenya, South

Africa, United Kingdom and North America.

The Pakistan Credit Rating Agency (PACRA) has allotted both long-term and

short-term ratings of Habib Metropolitan Bank Limited at "AA+" (Double A

plus) and "A1+" (A one plus), respectively. These ratings, being the highest

amongst the local sector private banks, denote a very low expectation of

credit risk emanating from a very strong capacity for timely payment of

financial commitments.

VISION STATEMENT

"Based on the foundation of Trust, to be the most respected financial institution, delighting customers with excellence, enjoying the loyalty of a dedicated team, meeting the expectations of regulators and participating in social causes while providing superior returns to shareholders"

5 YEARS OF FINANCIAL ACHIEVEMENTS WITH REGARDS TO DEPOSITS

Clearly we can see that HMB has exhaled in the Deposit area from 102

billion in 2006 to 142 billion in 2009 showing a remarkable increase of

average 10% each year. The average has gone down due to economic

slowdown and in 2008 where it has increased by only 6%. A tremendous

increase in 2005 was due to the merger between the HMB and Habib bank

AG zurich which has not been considered in deposit growth highlights due

to one off situation.

As for funding composition the deposit mix decreased from 70% to 60%

mainly due to the increase in borrowing mix from 17% to 29%. This main

increase in borrowings was due to money market borrowing and SBP export

refinance borrowing which both grew substantially.

YIELD ON EARNING ASSETS / COST OF FUNDS / NET MARGIN %

The modified ROA is self explanatory whereby it clearly depicts that the

ROA is falling due to decrease in PAT margin which is falling to due to high

markup expense. This is clearly evident that from the cost of funds graph

above and Deposit mix where the Cost is moving from 7.5% in 2008 to 7.9%

while current deposits mix fell from 32% in 2005 to 25% in 2009. While the

mix of high cost time and saving deposits has grown significantly.

MODIFIED ROA - ROE

HMB ACHIEVEMENT WITH ITS PEERS

HMB's yield has improved from 10% to 11.4% however the main concern is

the increase in cost of funds which also increased from 6.9% to 7.8%. The

increase in yield incrementally contributed towards the 0.4% increase in

margin but still HMB is the second last bank among its peers.

If we see the deposit comparison HMB has achieved the 6th ranking among

the peers while its stands 7th in peers in growth of current deposit.

Below is the graph of deposit composition of Current and Saving Accounts

(CASA) of the bank. HMB has the 6th largest current deposit composition

while is the last in savings and CASA overall. It must be kept in mind that

these current and saving deposits actually lower the cost of deposits

increasing your margin.

We can conclude easily that to succeed in this market and provide

shareholders a better return HMB needs to strive and untapped other

markets for deposits before other banks comes in and start giving

competition. HMB's main priority has been in providing trade finance

services which it does and because of this premier reason HMB has been

able to develop its current deposit portfolio. However, due to economic

slowdown and current flooding crises, the economy would be badly affected

by increase in discount rate, inflation which is expected to exceed 20% and

higher taxes. All these factors would bring the business situation at a

saturation level. It would be this moment when bank would aggressively try

to find ways to access other markets which is mainly the adult population of

this country. HMB at this moment would have a edge as it would be

delivering those segments already and would be a market leader.

IDENTIFYING UNSERVED SEGMENTS

A survey was conducted by World Bank during the year 2010, regarding the

populations who have access to financial sector all across Pakistan. The

extracts of the said survey was analyzed during my research, through which

relevant portion were extracted for further analytical process. Due to the

availability of authentic and reliable World Bank data (secondary data),

extracting primary data was like reinventing the wheel. Strata were built

upon the extracted secondary data i.e. population for the research, for

accurate and desirable results. The prime focus of the research is to identify

the unserved or underserved segments, therefore the relevant facts and

figures, were identified, analyzed and then fine tuned according to my

desire hypothesis.

KEY FEATURES OF SECONDARY RESEARCH DATA

47% men and 53% women (18 and above)

47% housewives form the single largest group followed by 30% self

employed and 12% employed

Largely married (71%) and 22% single

Mostly (74%) ordinary members of the household rather than the head of

the household

63% rural and 37% urban

31% illiterate, 54% with some primary to intermediate education and 16%

graduates and above

Predominantly in Punjab and Sind

FINANCIAL ACCESS STRAND

The Access Strand places the adult population along a continuous usage of

financial services, both formally and informally.

The financial access strand has four segments, as follows:

The "Banked"

Those using "Formal Other" financial products and services

Users of "Informal" financial products and services, and

The "Financially Excluded"

Banked

This group comprises of adults who currently use one or more traditional

banking products supplied by a financial institution. This is not an exclusive

usage category; adults in this group may also be currently using one or

more "formal-other" or "informal" products.

Formal Other

This group comprises adults who are currently using one or more formal

product supplied by a financial institution other than a bank by a financial

institution operating under legal governance. Such products include, for

example, insurance, leasing, microfinance, postal financial services etc.

These people do not have bank account, but have at least one financial

service from a regulated non-bank financial service provider. Thus, this is

also not an exclusive usage category, as people in this segment may also be

using one or more "informal" products.

Informal

This group consists of any adult who does not have a bank account or a

formal-other service, but uses one or more of "Informal" products that

operate without legal governance. Examples include borrowing from a

money-lender, shopkeeper or participating in a savings committee. This is

exclusive usage - the adults in this segment do not currently use any formal

products i.e. "Banked and Formal Other".

Financially Excluded

These are those adults who are excluded from all financial services -

Banked, Formal Others and Informal.

The Banked and Formal Other segments together make up people who are

Formally Included. Adding those who use informal services exclusively

broadens this group to those who are Financially Served. The latter are

financially served in the sense that they are using financial services from

either the formal or informal sectors, or both.The remaining adult

population, the fourth segment i.e. the Financially Excluded, are the ones

who do not have any services from any of the formal and informal sources.

They are usually using sub-optimal alternatives or solutions such as sending

money by hawala/hundi (informal means of money transfer), saving at

home, and borrowing from family and friends.

CURRENT FINANCIAL MARKET SITUATION

According to the data gathered people having bank accounts are merely

11% while another formal sector serves only the 1% adult population of our

country. This means that only 12% in total is under a threshold of

documented economy while the flow of money through undocumented area

is 88%. OPPORTUNITY!!!!

ACCESS STRAND ACROSS GENDER

The issue of financial exclusion is most severe along gender lines. There are

wide gaps between men and women who are banked, informally served and

the financially excluded.

ACCESS STRAND BY EDUCATION

Clearly, the choice of being banked improves progressively with level of

education. However, at the same time informal services are very popular

across educational groups, though less popular among those with graduate

level of education and above, and very low among the post graduates.

Moreover, across all educational levels there are large groups of people

who are financially excluded. In fact, more post graduates are financially

excluded (22%) than those who are availing informal financial services (9%).

ACCESS STRAND BY PROVINCE

The issue of financial exclusion is most severe in Baluchistan (84%) followed

by KP (61%). All other provinces have access to some form of financial

service, be it formal or informal. In all categories of access Baluchistan lags

far behind than other provinces.

The access scenario looks relatively bright in AJK due to the earthquake in

October, 2005. In order to receive governmental livelihood support, people

were required to open a bank account where aid could be deposited.

According to one estimate 1.5 million people largely residing in AJK have

been affected by the earthquake (Earthquake Reconstruction and

Rehabilitation Authority).

FINANCIAL ACCESS SALIENT FEATURES

More than half of the adult population that is financially excluded comprises

predominantly of housewives and students.

The informal sectors is predominantly being used by men with less

education and working in low paying jobs in the informal sector, agriculture

and daily wages.

The issue of access is most pronounced along gender lines. Women by far

have less access to all kinds of financial services (formal and informal) as

compared to men. Large majority of women are financially excluded

altogether.

Financial exclusion not only from any kind of formal but also informal

financial services is most severe in Baluchistan.

There is high co-relation between education and being banked. However, at

the same time there are large number of people who are not availing any

kind of financial service (formal and informal) across educational groups -

even among the graduates and post graduates.

Almost twice as many people are banked in urban than rural areas.

Otherwise the issue of exclusion and access to formal and informal services

is similar in urban and rural areas.

Single people tend to be most outside the financial services net (formal and

informal) as compared to married and widowed.

FINANCIAL LITERACY

The table shows the level of financial literacy among the Banked people

relating to the terms that people usually hear and understand. Green

highlighted portion refers to the awareness and understanding about very

basic financial terms used commonly in the population which generally is

high. The light blue highlighted region for the understanding about the

financial terms related with the formal financial services which is less than

high, but is less among the women. The yellow highlighted portion refers to

the sophisticated financial terms understanding which is yet even lower and

again women lag considerably behind men. The pink section refers to

understanding new rising types of banking among people who are banked,

particularly women!

INTEREST IN FINANCIAL MATTERS AND SOURCES OF FINANCIAL INFORMATION

A considerable mass of adult Pakistanis is interested in financial matters.

Overall 71% follow financial news "sometimes, often and always" rather

than never. However, the level of financial literacy among the overall adult

population in Pakistan is very low as depicted by the previous table.

The differentiating factors across the four segments show:

Banked population relies largely on newspapers and colleagues at work.

Financially Excluded and informally served depend on elder brother, father

and other family members.

The informally served also depend on local community forums like jirga for

their information while those in the "formal other" segment depend on

shopkeepers.

Surprisingly, television and radio are quite on the peripheries across the

Access Strand.

AREAS IN WHICH TRAINING IS WANTED BY ACCESS STRAND

Training interests of the informally served, financially excluded and those

using other formal services revolves around understanding basic money

management and financial concepts such as preparation of household and

personal budgets, how to save, and how to calculate profit on a bank

account. Whereas the banked are only marginally interested in learning

about the products offered by banks.

SALIENT FEATURES OF INFORMAL PRODUCT USERS AND FINANCIALLY EXCLUDED

The category of unbanked users having usage of informal products has the following characteristics:

Most of them are Self-employed on daily wages within the informal sector.

Male has the majority for usage of informal products.

This sector contains people having jobs related to:

Agriculture;

Laborer/Worker for Daily Wages;

Self-employed (Formal Sector);

Cart Holder/Hawker;

Services Selling Workers i.e. Carpenter, Barber, Ironsmith etc

Unemployed - Looking For A Job

Majority of them are from Punjab and Sind.

Informal users are mostly fall in category of married.

Education-wise - 4 To 9 Classes, Primary Complete.

And lastly they all are from rural area.

The characteristics of financially excluded users are:

Surprisingly Female leads this segment in a majority.

These females are mostly housewives and singles.

Employment Status: Housewife - Earn Income - Yes

Employment Status (Single): Student - Earn Income - No

Marital Status: Single or widowed

Baluchistan and NWFP

Education-wise these are Illiterate.

Resides in Rural areas.

48% of informal users say that they would like to have their own bank account while 31% of Financially excluded people would like to have a bank account. This means that almost 25 million people of both categories like to have bank account.

WHY PEOPLE ARE UNBANKED?

If 25 million of these people would like to have a bank account then what

are the reasons that they are still unable to get involve with any of the bank.

But before we go deeper into the unbanked people problems we should

know why the 11% banked population use bank for:

The above table gives solid evidence that banks are being used primarily for

the basic and necessity based reasons rather than for any sophisticated,

value added and productive reasons. This can be further verified that the

percentages for relatively more sophisticated, productive or convenience

based reasons such as accessing a business loan, money transfers, earning

an income or payment of utility bills have been stated by very few

respondents.

Further analysis reveals that urban areas are more towards the money

safety than rural. Also the rural areas want to be more into the business

relation and to access personal loans.

Now coming back to the unbanked reasons, the following table gives the

right idea:

Access related reasons, interestingly, are not the most important reasons

for being unbanked, than income related reasons are. Nevertheless people

who have cited choice and access related reasons are significant and is a

more ready potential market for banks. These segments need to be studied

and analyzed closely so that their reasons for being unbanked can be

addressed in a more targeted fashion. Contrary to the expectations, socio

cultural reasons have been cited by a mere 12% women as a barrier to

being banked!

HOW DO PEOPLE RECEIVE THEIR INCOME

Pakistan is predominantly cash based economy outside the formal economic

structures. 92% of the adult Pakistanis receive their income in cash and

almost half of the people say that "some" of this income goes into a bank

while 1/3 say that "None" of it is deposited in a bank!

SAVINGS AND INVESTMENTS

SBP CONCLUSION

Although National savings as a proportion of GDP increased 40 bps during

FY09 to 14.3 percent, the savings rate in Pakistan is the lowest among

neighboring countries. Moreover, this minor increase was primarily

attributed to the surge in workers' remittances during the year as domestic

savings as a percent of GDP declined from 11.5 percent in FY08 to 11.3

percent in FY09. The decline in savings during FY09 is primarily attributed

to the sharp reduction in overall economic activities and strong inflationary

pressures in the economy.

SALIENT FEATURES OF SAVING AND INVESTMENTS

56% of the total adult population saves or invest either formally or

informally. However, 53% save informally while formal savers are only 3%.

Saving at home is the most widely practiced across all segments

The top 4 means of saving across Pakistan are all informal. Only 8% of those

who save do so with a bank.

Even though people perceive government associated financial institutions as

secure, only 2% are investing in Prize Bonds, and 1% in National Savings

Schemes.

Almost a quarter of the adult population (23%) saves through Committees.

Contrary to expectations, committees are an urban (38%) phenomenon

rather than rural (14%) with nearly equal popularity among men and

women (about a quarter each)

INFORMAL WAYS OF SAVING USED BY BANKED

Even among the banked people, saving at home is very popularamong the

banked - across urban and rural areas. Same goes for participation in

savings committees, which are more popular among the banked urban

rather than the banked rural people. Investments in land and livestock are

more popular means of saving among the banked rural and among men

rather than in urban areas and among women.

REASONS FOR SAVING

There is a lot of overlap as to the reasons for savings, that is why the circle

overlap so much

It is clear however that the financially excluded and informal save for more

essential things than the banked who save for future retirement/holidays

etc.

PERCEPTION

In thinking about the financial service providers, what come more to

peoples mind are the prerequisites for transacting with them rather than

their services. The typical service features that consumers seek from

commercial banks and other financial service providers have scored low.

This reinforces the findings of the focus group discussions regarding weak

client service orientation of commercial banks. People's perception about

security of money at the banks is high which also conforms to an important

reason that the banked have stated for having a bank account.

As for informal financial service providers, the top perception statements

for committees and money lenders relate to no requirement of

documentation, and formalities. This is in striking contrast to the

perceptions regarding the formal sector providers. Additionally, more

people trust the informal sources as compared to the formal financial

institutions. As compared to the formal service providers, relatively

speaking satisfaction with the informal service providers is high.

FINANCIAL ACCESS FRONTIER

The frontier is a tool used to un-pack areas where opportunity exists to bank

the un-banked. The analysis is based on reasons for not being banked

although some duplication of response is possible, however the tool gives a

good indication of where focus of attention should be.

FINANCIAL MARKET DEVELOPMENT FRONTIER

So finally now, our frontier tool has identified the unserved segment of the

population and that is the informally served segment which is now an

opportunity. This segment can be divided into two parts:

Market Enablement zone

Market Development Zone

Market enablement zone is that segment which needs refinement in terms

of the perception towards banking while market development zone is ready

to serve zone, i.e the bank should start working on the products for such

sub-segment to cater their needs.

Following table would further strengthen my base of identification:

MARKET DEVELOPMENT ZONE

MARKET ENABLEMENT ZONE

MARKET RELOCATION ZONE

(Please note that HMB has its internal policy to serve the urban segment

largely than the rural areas and therefore the concentration of services to

banked the unserved will be urban area)

The distinguishing thing about this informal unserved segment is its saving

style which is mostly saved at home both in urban and rural area and which

does not goes in the banked economy. Secondly, this segment is more

dependent on committee based saving method. Interestingly in both the

criteria, female segment has marginally taken lead then males. It is

therefore suggested that ways should be develop to cater the needs of the

female segment while products should be developed to cater the increasing

trend of committees. For example a door step collection scheme should be

introduced with periodic contribution or commitment program.

CONCLUSION

Constraints to financial access arise from high levels of poverty, with low

awareness of information about financial services as well as gender

biasness. Technology can be harnessed to help expand geographical

outreach and overcome low literacy levels. Physical access can be increased

via new technology solutions such as branchless banking and mobile

banking. Simplified financial processes and procedures, client segmentation

and product diversification can help lower costs and manage risks better.

Summing up the whole data analysis, best formula that comes to ones mind

is rapid scaling up of access via technology, literacy gains, and financial re-

engineering of processes.

Client segmentation is one way that would allow institutions to better tailor

products to client needs as well as reduce costs and manage risks more

efficiently. Suggestions include:

Use of traditional saving arrangements and rotating savings, like for

example in Philippines family house-holds were provided with Ganansiva

Box to save their daily savings; this was called piggy banking.

Smaller size products and bulk service to better attract lower income

groups.

Literacy should not be a requirement to access financial services.

Innovative ways to reach customers such as decentralized operations,

transaction at door step, mobile units etc.

Lastly, REACHING OUT TO WOMEN due to their abilities to better manage

debt, their stronger saving patterns and client loyalty present an untapped

profitable clientele base for HMB. Understanding women needs more

precisely and reflecting those in the financial products would ensure an

increase in women's financial.