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BankingReview2014

BANKING REVIEW 2014 | April 20, 2015

ContentsFROM THE EDITOR’S DESKPAGE 4

BANKING STILL FOUND WANTINGAli Khizar Aslam PAGE 5

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

Syed Majeedullah HusainiPresident and CEO, Askari Bank Limited

NO LEAPS IN PRIVATE LENDING

PAGE 7

“RISK” DEFINING ASSET MIXZuhair AbbasiPAGE 22

SCB TO HARNESSLIFE CYCLE BANKINGShazad DadaCEO Standard Chartered BankPAGE 24

GOVERNMENT BONDTRADING ON LOCAL BOURSERabia LalaniPAGE 25

FLAT MCR PREVENTINGNICHE BANKING GROWTHHussain LawaiPresident, Summit BankPAGE 26

SBP’S ROLE IN TRANSFORMINGMICROFINANCEDr. Saeed AhmedPAGE 28

SBP SHOULD CAP BANKS’PIB INVESTMENTSShaukat TarinChairman Silk BankPAGE 30

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

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

BRANCHLESS BANKING SECTIONPAGE 38

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

PAGE 10

GOVERNMENT SHOULDBORROW DIRECTLY FROM PUBLICMunir KamalChairman NBP

PAGE 11

GREEN FINANCINGSidra Farrukh

PAGE 8

FINANCIAL INCLUSION:A DREAM NOT SO DISTANTHasan Faraz

PAGE 14

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

PAGE 12

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

PAGE 16

DEBT CAPITAL A PRESSING NEEDAtif BajwaCEO Bank Alfalah Limited

Ali Khizar AslamPAGE 33

LESSONS FROM KASB EPISODE

Tahira RazaPresident & CEO First Women Bank LtdPAGE 34

SMEs ARE OUR MAIN FOCUS

Sohaib JamaliPAGE 36

LAZY BANKERS? REALLY?

PAGE 17

A LOOK BACK TO BANKS IN CY14Rabia Lalani

BANKING IN NUMBERSPAGE 20

BR RESEARCHTHE TEAM

Sohaib JamaliResearch Editor

Ali Khizar AslamHead of Research

Murtaza KhaliqCreative Consultant

Research AnalystSyed Hasan Mehdi

Research AnalystJehangir Ashraf

Rabia LalaniResearch Analyst

Zuhair AbbasiSenior Research AnalystRabia LalaniResearch AnalystZuhair AbbasiSenior Research Analyst

Sijal FawadResearch AnalystMobin NasirEditorial Consultant

Sidra FarrukhResearch Analyst

Naseem Waheed

Page 04 / Banking Review 2014 / April 20, 2015

Banking system and economic growth

From Editor’s desk

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

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

Banking still found wantingAli Khizar

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

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

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

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


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

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

Bank-led model is the rightmodel for branchless banking

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

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

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

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

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

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

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

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

from Rs14-15 billion to Rs24 billion. In a country of 180 million people, which is 70 percent agri-based, why shouldn’t this tally be Rs40 or Rs80 billion? All you need to do is have good underwriting standards and a strong field presence that understands the local dynamics which dictate the perfor-mance of loans. Five years ago this was a lot harder. But when you understand the environment, deploy people and technology, performance improves significantly. Similarly in the case of consumer lending, the growth is over 20 percent. If we can build on this, we can break into those segments. We are focusing on

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

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

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

Interview by Ali Khizar & Mobin Nasir

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

Nauman DarPresident, Habib Bank Limited

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


No leaps in private lending

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

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

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

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

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

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

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

Interview by Mobin Nasir & Zuhair Abbasi

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

Syed Majeedullah HusainiPresident and CEO Askari Bank Limited

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


Page 15Page 32 / Banking Review 2015 / April 13, 2015

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


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

FinancialInclusion:A dream not so distant

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

Hasan Faraz

INTERVIEW BY: MOBIN NASIR AND SOBIA SALEEM

Government should borrow directly from public

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Munir Kamal | Chairman NBP

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

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

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

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

“All vibrant economies have prevalence of mortgage finance

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

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

mortgage finance segment collectively as an industry,”

Interview by Mobin Nasir & Zuhair Abbasi


Sidra Farrukh

Green financing

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

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

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


House finance and corporate lending to thrive in 2015

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

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

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

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

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

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

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

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

Interview by Ali Khizar & Sidra Farrukh

Mian Muhammad Mansha | Chairman, MCB

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


Page 15

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

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

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

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

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


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

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

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

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

Over arching these initiatives is SBP’s target allocation and monitoring function wherein SBP works closely with banks to ensure challenging targets are set and utmost e�orts are made to achieve them. It is through constant monitoring and feedback that progress is ensured and any deviations are addressed in a timely manner. Other than quarterly meetings with regional management to review performance and address issues, SBP plays a facilitation role to provide maximum support to banks so that they don’t fall short of their targets. The result of this constant push can be seen in a steep upward trend of agri-credit targets where disburse-ments are continually surpassing targets. The growth in agri-credit has continued to outpace the growth in agricultur-al value-added in GDP and is fast catching up to bridge the gap between credit demand and supply. Disbursements for the first half of FY14-15 have been Rs219.5 billion which constitutes 44 percent of the total target of Rs500 billion is 38 percent higher compared to Rs159.4 billion disbursed in the corresponding period last year.

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

Gap (as % of demand)SupplyDemandYear

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

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

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

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

Page 15

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

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

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

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

Over arching these initiatives is SBP’s target allocation and monitoring function wherein SBP works closely with banks to ensure challenging targets are set and utmost e�orts are made to achieve them. It is through constant monitoring and feedback that progress is ensured and any deviations are addressed in a timely manner. Other than quarterly meetings with regional management to review performance and address issues, SBP plays a facilitation role to provide maximum support to banks so that they don’t fall short of their targets. The result of this constant push can be seen in a steep upward trend of agri-credit targets where disburse-ments are continually surpassing targets. The growth in agri-credit has continued to outpace the growth in agricultur-al value-added in GDP and is fast catching up to bridge the gap between credit demand and supply. Disbursements for the first half of FY14-15 have been Rs219.5 billion which constitutes 44 percent of the total target of Rs500 billion is 38 percent higher compared to Rs159.4 billion disbursed in the corresponding period last year.

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

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


Changing market structure of agri-financingFY07-08

Agri-GDP growth v/s growth in credit supply

FY14-15

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

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

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

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

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

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

Interview by Ali Khizar & Sidra Farrukh


Debt capital a pressing need

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

Atif BajwaCEO Bank Alfalah Limited

Page 15

Definitely, banks couldn’t have asked for more in CY14! Followed by a lackluster period, banks made a stellar comeback on local bourse this year. As the benchmark KSE100 index gained 27 percent, BR banking index outran with a return of 32 percent. This was both a result of the government raising debt at hefty rates with banks becoming the major lender and the SBP opting for a monetary easing stance as the year came to its close. This gave banks merry-making sessions throughout the year while keeping the sector in limelight on local bourse.

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

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

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

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

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

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


The writer is a Research Analyst at Business Recorder.

A look back to banks in CY14

A look back to banks in CY14Rabia LalaniRabia LalaniRabia Lalani

Draft mortgage recoverylaws to be finalized soon

Ashraf Wathra | Governor, State Bank Of Pakistan

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

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

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

BRR: How can the banks do that; do they have a mandate for it?AW: They can do it through their credit policy by being relatively stringent on non-essential imports. If voluntary measures don’t work, then we will consider regulatory measures.

BRR: What kind of measures are we talking about here?AW: We will discuss that with the Ministry of Commerce because import and export policies are essentially their

domain and when it comes to regulatory measures we will also take the Ministry of Finance on board.

BRR: So you are talking about fiscal tools?AW: No, we are talking about cash margins.

BRR: Our exports have been stagnant, though there has been some improvement in textile exports after GSP+. Have you considered any monetary measures that can boost export competitiveness?AW: If you go back to the budget announcement, we gave incentive pricing on export refinance, at rates lower than the previous year. Hence we facilitated exports through that measure. Likewise, long-term finance for export projects also


received additional incentives through incentivized pricing on those loans. That is the purview of the central bank and if need be, we will review those rates. But when it comes to exogenous factors like law and order issues in certain industrial areas or power outages, then other state organs have to play an e�ective role as it is not the central bank’s domain.

BRR: The REER is evidently higher while there is a global slowdown. Does that not strengthen the case to allow

exchange rate depreciation to make exports more competitive globally?AW: We do not operate a fixed exchange rate regime. And the prevailing parity in the market is a function of demand and supply. Very recently, Russia tried to defend their exchange rates. They tried very hard; making dollar purchases and hiking the interest rate to 17 percent. We have seen this happening in many other markets. So we are not trying to protect the value of the domestic currency.

BRR: But if REER has appreciated, isn’t it the responsibility of the central bank to restore equilibrium.AW: Any manipulation can be seen in a very di�erent light so the SBP does not want to manipulate the rate. Let the market perform its function.

BRR: What is the SBP doing to spur lending as banks have not been giving loans to private sector despite the fall in interest rates?AW: Now we are talking about enforcement. Yes the policy rate has gone down by 150 basis points in the last two reviews and yet there is no reflection of it in private sector borrowing.We have held a meeting with the banks and made this point with them; we want to see gross spreads coming down by June 30 2015. Such things happen best if done voluntarily, as we are inculcating a free market. But if we don’t see any benefit being passed to borrowers, then we will take regulato-ry measures; we always have the regulatory choice to fix gross spreads at a maximum of 4.5 percent. But you know financial intermediation and policy rate are not the only determinants of private sector credit o�-take. There are structural issues at play.

BRR: Don’t you think there is rent-seeking by the banks? The banks buy government paper, and then SBP injects huge chunks of liquidity through treasury bills.AW: I agree that banks’ appetite for risk is compromised because of easy access to T-bills and bonds and they need to be pushed through persuasion. If that doesn’t work, we can make them do it. We will be watching their spreads on a monthly basis and we expect results sooner than June-end. We have a very compliant industry and there is no reason why the banks will not voluntarily reduce spreads.

BRR: The issue is that banks do not have to compete. They get low cost deposits and park funds with the govern-ment. How is the SBP creating competitive environment to benefit savers?AW: If you look at our bank deposits, you will find that compared to the region and other comparable economies, the percentage of current and demand accounts is relatively higher. Our depositors prefer these over savings accounts, fixed deposits or national savings. This is because there is lack of financial literacy for which we have been running courses all over the country. It may also be belief-based and banks take advantage of that. So we have an issue here and it is unusual. However, in last

2-3 years we have improved significantly, especially due to alternate delivery channels where the number of accounts and transactions are increasing by the day.

BRR: How can we improve financial literacy?AW: A financial literacy and inclusion program is currently being developed by a World Bank team for Pakistan. The SBP took an initiative to include their experience and expertise in this project and they are helping us develop the plan for that.

The basic idea is to expand the base from 35 million deposi-tors by creating facilities that serve this goal. The number of bank branches is increasing so our coverage is also getting better with the ATM network and microfinance network. Financial inclusion is a transition. Even if the banks in rural areas begin with simple savings accounts, eventually there will be a time when the depositors will display appetite for other banking products.

BRR: Mortgage finance industry has not developed in the country to date. What steps have been taken to create long-term financing market?AW: The last time the recovery law was amended was in 2002 and that was a great development after a struggle of many years. That amendment allowed banks to repossess properties in case of non-performance by the borrower. Subsequently, in a Supreme Court decision, that empowerment was shot down.Now we are in a market where the recovery cases in banking courts can last 20 or even 50 years. If you look at the

countries where mortgage finance is well developed, repossession laws are quite clear and the process is quick. The banks would be very keen and excited to promote mortgage finance once we can sort out our recovery laws.There is a new draft amendment that has been prepared in

consultation with stakeholders and we hope to present it to the government soon since that is critical for developing housing finance in the country. In a recent survey, our finding was that we need nine million homes. The government has already announced its intent to tackle this challenge. Another development worth mentioning is that HBFC was dysfunctional for many years and it owed SBP substantial amount; about Rs13-14 billion including profit. We proposed to the government that this corporation will never be able to pay back this amount so it should be converted into equity. Consequently the SBP is now the largest shareholder in HBFC and we are working hard to ensure viability.

BRR: What about other shortcomings like the absence of a long-term yield curve?AW: The market will evolve if this issue is sorted out.

BRR: How do you think the banks could help in economic growth?AW: I think the focus of the industry should be on developing entrepreneurs and markets; not plain vanilla lending and deposit accumulation only. As a growing economy, we need to find and support new entrepreneurs.

BRR: Do you think the banks are geared up for boosting consumer finance?AW: I think if we go back to pre-2000, the consumer finance segment did not exist and that was the first round they had in the early 2000s. Some banks got too gung-ho with it but perhaps they have learnt lessons and will approach the same products more prudently this time around.

BRR: Let’s talk about the KASB saga. How do you justify SBP’s actions? AW: Our action is primarily aimed at protecting the depositors, which are around Rs50-60 billion. Regulators have to take such actions and it is an international norm. We used to have 3-4 banks in that category. All of them had earlier agreed a roadmap with the central bank and all the others were achiev-ing those milestones except this one. Every month they had a new release but they did not live up to any of their own plans.

BRR: Couldn’t you have asked a big bank to merge with them?AW: How would we do that? Overnight? Due diligence requires time, and without a moratorium, if few banks had commenced due diligence of another bank, the media would report it as a bank going down the drain. There would have been a crisis. We take these steps after a lot of calculations and very serious considerations. Other markets like India, Sri Lanka have a lot more incidents like this but we do not because we take such prudent steps.

BRR: What will happen to the depositors?AW: In the financial history of Pakistan, no depositor has ever lost money and we will ensure that these depositors will also not lose any of their money. The maximum time available for this is six months from the date of announcement of moratorium.

Mr. Wathra’s association with the SBP started when he assumed charge of the o�ice of Deputy Governor (DG), State Bank of Pakistan (SBP) on March 11, 2013. The Federal Government had notified Mr. Wathra’s appointment as DG, SBP on March 5, 2013 for a period of three years from the date he assumed o�ice.

Mr. Wathra brings 35 years of commercial & investment banking experience to his new assignment. Prior to joining SBP, he was serving the National Bank of Pakistan (NBP) as its Senior Executive Vice President & Group Chief, Credit Management Group, since October, 2012.

Mr. Wathra holds extensive experience in restructuring and reorganization of business units. He has extensive knowledge of investment banking and commercial banking operations, trade finance products and underlying delivery systems

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

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

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

BRR: How can the banks do that; do they have a mandate for it?AW: They can do it through their credit policy by being relatively stringent on non-essential imports. If voluntary measures don’t work, then we will consider regulatory measures.

BRR: What kind of measures are we talking about here?AW: We will discuss that with the Ministry of Commerce because import and export policies are essentially their

domain and when it comes to regulatory measures we will also take the Ministry of Finance on board.

BRR: So you are talking about fiscal tools?AW: No, we are talking about cash margins.

BRR: Our exports have been stagnant, though there has been some improvement in textile exports after GSP+. Have you considered any monetary measures that can boost export competitiveness?AW: If you go back to the budget announcement, we gave incentive pricing on export refinance, at rates lower than the previous year. Hence we facilitated exports through that measure. Likewise, long-term finance for export projects also

received additional incentives through incentivized pricing on those loans. That is the purview of the central bank and if need be, we will review those rates. But when it comes to exogenous factors like law and order issues in certain industrial areas or power outages, then other state organs have to play an e�ective role as it is not the central bank’s domain.

BRR: The REER is evidently higher while there is a global slowdown. Does that not strengthen the case to allow

exchange rate depreciation to make exports more competitive globally?AW: We do not operate a fixed exchange rate regime. And the prevailing parity in the market is a function of demand and supply. Very recently, Russia tried to defend their exchange rates. They tried very hard; making dollar purchases and hiking the interest rate to 17 percent. We have seen this happening in many other markets. So we are not trying to protect the value of the domestic currency.

BRR: But if REER has appreciated, isn’t it the responsibility of the central bank to restore equilibrium.AW: Any manipulation can be seen in a very di�erent light so the SBP does not want to manipulate the rate. Let the market perform its function.

BRR: What is the SBP doing to spur lending as banks have not been giving loans to private sector despite the fall in interest rates?AW: Now we are talking about enforcement. Yes the policy rate has gone down by 150 basis points in the last two reviews and yet there is no reflection of it in private sector borrowing.We have held a meeting with the banks and made this point with them; we want to see gross spreads coming down by June 30 2015. Such things happen best if done voluntarily, as we are inculcating a free market. But if we don’t see any benefit being passed to borrowers, then we will take regulato-ry measures; we always have the regulatory choice to fix gross spreads at a maximum of 4.5 percent. But you know financial intermediation and policy rate are not the only determinants of private sector credit o�-take. There are structural issues at play.

BRR: Don’t you think there is rent-seeking by the banks? The banks buy government paper, and then SBP injects huge chunks of liquidity through treasury bills.AW: I agree that banks’ appetite for risk is compromised because of easy access to T-bills and bonds and they need to be pushed through persuasion. If that doesn’t work, we can make them do it. We will be watching their spreads on a monthly basis and we expect results sooner than June-end. We have a very compliant industry and there is no reason why the banks will not voluntarily reduce spreads.

BRR: The issue is that banks do not have to compete. They get low cost deposits and park funds with the govern-ment. How is the SBP creating competitive environment to benefit savers?AW: If you look at our bank deposits, you will find that compared to the region and other comparable economies, the percentage of current and demand accounts is relatively higher. Our depositors prefer these over savings accounts, fixed deposits or national savings. This is because there is lack of financial literacy for which we have been running courses all over the country. It may also be belief-based and banks take advantage of that. So we have an issue here and it is unusual. However, in last

2-3 years we have improved significantly, especially due to alternate delivery channels where the number of accounts and transactions are increasing by the day.

BRR: How can we improve financial literacy?AW: A financial literacy and inclusion program is currently being developed by a World Bank team for Pakistan. The SBP took an initiative to include their experience and expertise in this project and they are helping us develop the plan for that.

The basic idea is to expand the base from 35 million deposi-tors by creating facilities that serve this goal. The number of bank branches is increasing so our coverage is also getting better with the ATM network and microfinance network. Financial inclusion is a transition. Even if the banks in rural areas begin with simple savings accounts, eventually there will be a time when the depositors will display appetite for other banking products.

BRR: Mortgage finance industry has not developed in the country to date. What steps have been taken to create long-term financing market?AW: The last time the recovery law was amended was in 2002 and that was a great development after a struggle of many years. That amendment allowed banks to repossess properties in case of non-performance by the borrower. Subsequently, in a Supreme Court decision, that empowerment was shot down.Now we are in a market where the recovery cases in banking courts can last 20 or even 50 years. If you look at the

countries where mortgage finance is well developed, repossession laws are quite clear and the process is quick. The banks would be very keen and excited to promote mortgage finance once we can sort out our recovery laws.There is a new draft amendment that has been prepared in

consultation with stakeholders and we hope to present it to the government soon since that is critical for developing housing finance in the country. In a recent survey, our finding was that we need nine million homes. The government has already announced its intent to tackle this challenge. Another development worth mentioning is that HBFC was dysfunctional for many years and it owed SBP substantial amount; about Rs13-14 billion including profit. We proposed to the government that this corporation will never be able to pay back this amount so it should be converted into equity. Consequently the SBP is now the largest shareholder in HBFC and we are working hard to ensure viability.

BRR: What about other shortcomings like the absence of a long-term yield curve?AW: The market will evolve if this issue is sorted out.

BRR: How do you think the banks could help in economic growth?AW: I think the focus of the industry should be on developing entrepreneurs and markets; not plain vanilla lending and deposit accumulation only. As a growing economy, we need to find and support new entrepreneurs.

BRR: Do you think the banks are geared up for boosting consumer finance?AW: I think if we go back to pre-2000, the consumer finance segment did not exist and that was the first round they had in the early 2000s. Some banks got too gung-ho with it but perhaps they have learnt lessons and will approach the same products more prudently this time around.

BRR: Let’s talk about the KASB saga. How do you justify SBP’s actions? AW: Our action is primarily aimed at protecting the depositors, which are around Rs50-60 billion. Regulators have to take such actions and it is an international norm. We used to have 3-4 banks in that category. All of them had earlier agreed a roadmap with the central bank and all the others were achiev-ing those milestones except this one. Every month they had a new release but they did not live up to any of their own plans.

BRR: Couldn’t you have asked a big bank to merge with them?AW: How would we do that? Overnight? Due diligence requires time, and without a moratorium, if few banks had commenced due diligence of another bank, the media would report it as a bank going down the drain. There would have been a crisis. We take these steps after a lot of calculations and very serious considerations. Other markets like India, Sri Lanka have a lot more incidents like this but we do not because we take such prudent steps.

BRR: What will happen to the depositors?AW: In the financial history of Pakistan, no depositor has ever lost money and we will ensure that these depositors will also not lose any of their money. The maximum time available for this is six months from the date of announcement of moratorium.



if we don’t see any benefit being passed to borrowers, then we will take regulatory measures

The focus of the industry should be

on developing entrepreneurs and markets; not plain

vanilla lending and deposit

accumulation only

“

“

900

2,100

3,300

4,500

5,700

6,900

50%

55%

60%

65%

70%

75%

CY08 CY09 CY10 CY11 CY12 CY13 CY14

Rs(bn)

Banks inclined towards low-cost depositsDeposits (RHS) CASA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

CY08 CY09 CY10 CY11 CY12 CY13 Jun-14

Rs(bn)

Other deposit Accounts Fixed Deposits Call Deposits

Saving Deposits Current Accounts

Breakup of industry deposits by account type

32%

36%

2%

23%

0.34%

Current Accounts Saving Deposits Call DepositsFixed Deposits Other deposit Accounts

Saving deposits grab largest chunk (Jun-14) Breakup of industry deposits by depositer type (June-14)

Personal Prviate Sector enterprises GovernmentNon-Financial SOEs Others

No. of Bank Accounts

Average deposit per bank accountAverage Deposit size (L.H.S)

20

25

30

35

40

130

150

170

190

210

230

250

CY08 CY09 CY10 CY11 CY12 CY13 Jun-14

(mn)Rs('000)

8%

11%

14%

17%

20%

150

250

350

450

550

650

CY09 CY10 CY11 CY12 CY13 CY14

Rs(bn)

NPLs Loan Coverage Infection Ratio (R.H.S)

Asset quality of banking sector growth shows signs of improvement

Category-wise NPLs to total loans


5

10

15

20

25

30

35%

Public Sector Commercial Banks

Local Private Banks

Foreign Banks

Specialized Banks

Category-wise coverage ratioPublic Sector Commercial Banks

Local Private Banks

Foreign Banks

Specialized Banks

45

55

65

75

85

95

105


%

Category-wise ROAPublic Sector Commercial Banks

Local Private Banks

Foreign Banks

Specialized Banks

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


%

Banking in numbers


Financing mix of Islamic banking industry

Murabaha

Ijarah

Musharaka

Mudaraba

Diminishing Musharaka

Salam

Istisna

Qarz-e-Hasna

Others 0.02

0.06

0.1

0.14

0.18

0.22


Islamic banking infection ratio

Infection Ratio - Islamic Banking Infection Ratio - Industry

300

400

500

600

700

800

400

550

700

850

1000

1150


Rs(mn)

Islamic banking branch networkNo. of Branches (L.H.S) Average Deposit per branch

Category-wise ROE

Public Sector Commercial Banks

Local Private Banks

Foreign Banks

(6.0)

(3.0)

0.0

3.0

6.0

9.0

12.0

15.0

18.0


Segment-wise advances and infection ratio (Dec'14)

0%

5%

10%

15%

20%

25%

30%

35%

40%

50

450

850

1250

1650

2050

2450

Corporate SME Agriculture ConsumerFinance

CommodityFinance

Sta� Loans

Rs(bn)

Advances (L.H.S) Infection Ratio

30

130

230

330

430

530

630

730

830

930

0%

10%

20%

30%Rs(mn)

Ag

ribu

sin

ess

Tran

spo

rtat

ion

Cem

ent C

hem

ical

s

Fin

anci

al

Ind

ivid

ual

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Top-10 sectors (in terms of lending) and their infection ratio (Dec'14)Advances (R.H.S) Infection Ratio

Islamic Industry Assets (L.H.S) Share in Banking Industry

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Phenomenal growth of Islamic banking industry over the years

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CY09 CY10 CY11 CY12 CY13 CY14 4,000

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Assets skewed in favor of investments

Total Assets (R.H.S)


“Risk” defining asset mixZuhair Abbasi

“It is bit of a chicken and egg question,” is all what a top current banker had to say when asked what is behind the now-established, seemingly never ending love a�air between banks and government securities. Whether it is the govern-ment’s unfathomable domestic borrowing appetite or genuine decay in banks’ willingness to lend is still debatable. The last year when advances of the sector were still growing faster than investments in absolute terms, was way back in CY08. The advances-to-deposit ratio (ADR) was comfortably in the 70s and investment-to-deposit ratio (IDR) in the mid-20s. But in CY09 the investments came in pouring – the IDR bar raised his head and never looked back. The IDR and ADR graph is a chartists’ dream – very rarely are graphs talking this loudly.

All said every single calendar year in the past five has seen investments outpacing advances by quite some margin. The IDR now stands at near 60 percent. A former State Bank of Pakistan Governor pointed out that banks were more worried about the rising NPLs then the mark-up yields even during low interest rate scenario, which is why they shied away from lending since CY09. The infection ratio in the five year period starting from CY09 has averaged 16 percent, significantly higher than the 10 percent average infection ratio in the five years period leading to CY09. The level of nonperforming loans has been the most decisive factor in banks assessing their asset mix strategy. “The persistent energy crisis has the biggest shout in banks tilting their asset mix. Of all available variables, the infection ratio has the highest correlation with the ADR, which explains the recent trend more than the discount rate or the level of spreads,” told a State Bank of Pakistan ex-governor. You would think the banks’ lending practice has a lot to do with a country’s GDP growth. It ideally should, as a World Bank report clearly states a positive correlation of 0.9 between GDP growth and ADR around the globe. But Pakistan

is an exception – a big one. In Pakistan’s case, the GDP-ADR correlation, if you can call it that, is very weak at 0.49 for the past ten years. It has not been always the case, the post CY10 movements have been di�icult to understand, which is where, when banks are labeled ‘lazy’, it deserves some merit. Banks having faced the brunt of toxic assets in CY08 have been rather cautious. As soon as the infection ratio inched to double digits, the ADR started slowing down, and investments kept surging. A positive correlation of 0.85 between ADR and infection ratio substantiates the argument. Even a slowdown in discount rate, gradual decline in infection ratio and declining spreads were not enough to pull banks out of the slumber – as profit making came through the rather easier route of investments in sovereign papers. Consider this: investments by the end of CY14 were where the sector deposits were just four years ago. They are at a level, higher than advances have ever reached in this country. They have almost trebled in four years. The whole exercise in the name of debt re-profiling played right in the hands of bankers sitting back and they grabbed the opportunity with both hands. So what is with the spreads then? How much pressure have they coped? Pretty well it appears. Banking spreads have not followed any pattern in the past ten years. Sector average spreads at 5.9 percent stood at a multiyear low in CY14 and at least that should have called for a shift in asset composition. Recall that spreads were the highest in CY11, when infection ratio reached its peak of 18 percent and ADR for the first time went below 50 percent. Interesting is the fact that both spreads and ADR and discount rate and ADR have had absolutely no correlation, in the past 10 years. Banking spreads have now slid for three consecutive years. Even the infection ratio is coming down, albeit, slowly. Yet the banks do not feel the need to alter strategy to counter sliding spreads. And they have good reason for that. The e�ort has rather been put in buttressing

the deposit mix and cash on the lucrative yields in govern-ment papers. There is a wide belief that banks are now faced with no option but to start lending to the private and consumer segments. But not all bankers agree. Some still think the banks will rather have lower spreads than run high risk of exposing assets to risky borrower. And the data supports this argument. In an ideal world, banks should have gone all out lending, when the spreads started to squeeze. Even the first quarter of CY15, has not been much di�erent. The government’s will to borrow remains, and although the yields have come down crashing, there is enough appetite out there. Almost a trillion rupees in PIBs and treasury bills have already been raised at significantly lower yields. Some bankers’ interviews for this publication hinted at the same, citing foreclosure laws and energy problems as critical factors.

So low spreads or not, high GDP growth or otherwise, it is ‘risk’ that is defining banks’ asset portfolio. They have found enough ways to work around with a thinner topline. They will continue to endorse government’s sovereign papers; regardless of the rate. Surely, if risk is that important a determinant, something needs to be done about bankruptcy laws, banking courts and the whole legal procedure. Financial intermediation will remain a distant dream otherwise.


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The writer is Senior Research Analyst at Business Recorder newspaper. He can be reached at [email protected]

SCB to harnesslife cycle bankingShahzad Dada | CEO Standard Chartered Bank

BR Research: How do you gauge emerging economic conditions in terms of opportunities and challenges for the banking sector?Shahzad Dada: Banks’ primary business is to promote the economy and to do that they must lend to the private sector. There are some encouraging developments on the political and economic fronts. There has been a transition from one democratically elected government to the next and there is evidence that consistency is emerging in policies. Then interest rates are coming down and many projects that were on the shelf are becoming feasible. Lower oil prices are a big positive for the domestic economy. So I think there are definitely some great opportunities on the horizon for businesses in the country and consequently for the banks too. The National Debt Conference organized by your paper in October 2014 had touched on the topic of high spreads emanating from loans to the government sector. Prudent banks had expected these spreads to come down and will do well. The ones that will find themselves in a very odd spot will be the banks that have not developed the right products and inculcated the right clientele and have become too occupied with the government sector. Net depositors will feel the pinch as rates come down. As far as Standard Chartered Bank goes, our clients are very upbeat and we expect their capital needs to increase. Our bank is well positioned to o�er a series of solutions that they can use to benefit from the falling interest rates.

BRR: Which sectors do you plan to concentrate on in terms of lending?SD: Any business which is capital intensive will benefit. We have an energy crisis and there will be significant appetite for capital there. We have a large exposure in the energy sector and we see ourselves increasing that further. Textile sector has always been the backbone of our economy and as energy problems are resolved, their capital needs will also grow. A lot more infrastructure development will take place in coming months, so the cement sector will be up there in terms of bank’s exposure. Telecom sector has just scratched the surface with the introduction of 3G/4G technology; housing sector has immense potential.

BRR: Are the banks poised to capitalize on mortgage finance?SD: In Thailand, mortgage as a percentage of GDP is at 12 percent, in the EU it is at 23 percent; 58 percent in the United State of America; in Turkey it’s about six percent. In Pakistan, this tally is a mere 0.4 percent. The point is, we don’t have a mortgage market and we must develop it to address the aspirations of our middle class. As you know, the parallel economy is growing at a much faster rate than the documented sectors. We need to get informal sectors into the documented fold and the housing sector is one of the largest among these.

I think interest rates are a big impediment but first and foremost we need to get the informal sector into the formal, by addressing recovery laws. Everywhere else in the world, recovery through due process within the legal system is a much more truncated process than in Pakistan. In our country there are decree cases where possession cannot be taken and that’s discouraging for the banks. We need some corrective actions. So the first area that we need to work on is the legal system. Then the ability to access land records electronically must be provided. Documentation has to be made easier and more transpar-ent. In a competitive landscape, interest rates will come down but due process for addressing defaults is necessary to provide vibrancy to this market segment.

BRR: How will the deposit base be scaled up to meet higher demand for advances?SD: When you rebase the economy with a lot of these informal sectors entering the formal economy, it will automatically help bank deposits. The aim of every successive government is to bring more people into the tax net but unfortunately that hasn’t really happened. We need to take steps to encourage people to come into the regulated economy. One good step that the current government has moved on is the acceptability of CNIC instead of NTN numbers. Banks also have to make it attractive for these people to deposit their funds with banks.

BRR: What is SCB doing to enhance bank deposits?SD: We have a very young population and there are a lot of people who would prefer a more convenient and faster way of interacting with banks. I think we need to make banking easier. SCB is really focusing on that demographic and their requirements based on very deep understanding of their preferences which are; speed, convenience, service and cost e�iciency. We are investing heavily on the digital side. We opened our first digital branch in February. We also have a mobile application that supports Android and iPhone which lets you make most major payments from utilities to club and school fees. The more convenience you can add, the more people who are not using banks will use them. Financial inclusion has to happen, but not in the old fashioned way. The fastest way for banks to reach people is through the mobile channel. The SBP has done a fantastic job in terms of devising regulations for branch-less banking. There is still a sense of worry among people as far as mobile banking is concerned and the entry of well reputed banks like SCB will go a long way in bolstering customers’ confidence in alternative delivery channels including mobile banking. The common person still measures the size of a bank through the number of branches; not the size of the balance sheet. That tells you about the current mindset. Today, 67 percent of our transactions are digital!

BRR: SCB has significantly higher deposits per branch compared to the industry. Will the bank stick to a strategy of rationalizing number of branches or is there a blitz of new branches on the horizon?SD: We will continue to work on increasing the quantum of deposits. Wherever we feel we are not getting the right level of deposits, we may optimize a branch or relocate it. We are comfortable with the current number of branches and with the network in terms of the cities that we are able to service. There are certain inherent challenges in going too deep into rural and semi-urban parts of the country. That’s where we are using our branchless banking, mobile banking and straight-to-bank solutions. We feel those are more conducive ways in these segments for our bank.

BRR: What is going to be your strategy going forward?SD: We have to become more creative and optimize. On the delivery side we need more clients, more services, more cross selling. Having a retail business that is second to none in the country; a newly formed commercial clients business which caters to medium-sized enterprises and acting as a bridge to institutional clients which are the large-cap, known names; we can work with clients through their life cycles. We have lots of clients that use their CNIC to purchase equipment or services from the mid-sized firms while availing vendor financing, receivable financing, and a host of other services that help cement their business relationships. A lot of our clients in both those categories require employee and payroll banking. Through our branch network we provide those services and once they are in the retail banking fold, we o�er wealth management and advisory. The idea is that once you are in the Standard Chartered family, we want to be with you for much more than a one-product relationship. We want to be relevant to our clients and we want to be their primary bank. We are clear on where our strengths are and we want to continue progressing along those.

BRR: Most banks are bullish on expansion through Islamic banking. What are your views?SD: We celebrated our tenth year of o�ering Islamic banking. It’s a business that allows us to o�er services that are desired by a significant proportion of clients. Today it constitutes about 15 percent of our revenues while the aspiration is to take it to 20 percent of revenue. We have 10 dedicated branches and windows at all other branches.

Interview by Ali Khizar & Zuhair Abbasi

Shahzad Dada, CEO SCB, tells BR Research the bank’s strategy going forward; the sectors it would target for lending, its plans for boosting deposit base, and harnessing life cycle banking which is essentially working with clients through their life cycles. Below are the edited transcripts.



Revenue generation and sustainability of forex reserves have been the two very crucial issues that successive governments in Pakistan have been wrestling with. Dependence on foreign aids cannot be relied upon as a permanent source of revenue, while borrowing from central bank leads to higher inflation. In such a scenario, borrowing from commercial banks has become the key recourse for the government. Consequently, with the government holding the biggest slice of the cake, private sector has been left in the lurch. These factors have prompted the government to explore alternative sources to generate revenue for project financing. Trading of government securities on local bourse has been one such initiative in this direction which is aimed at drawing the savings of retail segment in government securities in order to reduce the burden of government borrowing on banking system. However, the development of retail segment and providing retail investors with an alternative investment platform were also the key motives behind the launch of government bond trading at local stock exchanges. Currently, the major proportion of government securities i.e. treasury bills (T-Bills), Pakistan Investment Bonds (PIBs) and Ijara Sukuks is held with banks. According to latest SBP data, a whopping 75 percent is held by banks; while the remaining is distributed among corporate, funds, insurance companies and retail investors. The share of retail investors in government securities remains negligible and hence not separately disclosed by SBP. In the case of India, the investor base is widely diversified and bank’s concentration in government securities is limited to nearly 38 percent. Also, in G20 advanced countries and the euro area, holding of banks in government securities does not exceed 30 percent, according to a working paper released by International Monetary Fund (IMF). Hence, compared other countries, the share of government securities held by banks in Pakistan is quite high.

FIXING THE TIGHT CORNERSInfluencing retail investors to invest in debt through stock exchange depends on how soon the trading structure is fine-tuned and the tight corners are fixed. Experts say that present debt trading module does not focus on some of the few crucial determinants of a well-functioning debt capital market. These include ensuring liquidity and incentivizing banks to promote trading of government securities to retail investors.Liquidity is the investors’ primary concern, in any market, anywhere in the world. With regards to the trading of government securities on Karachi Stock Exchange, limited trading activity owing to thin number of buyers and sellers has rendered local bourse as an illiquid investment channel. One plausible solution to address the liquidity concern is to designate market makers. However, in the context of SBP’s regulations for primary dealers, a minimum lot size of Rs100 million is required for market making. In a recently published interview with BR

Research, Nadeem Naqvi, Managing Director at Karachi Stock Exchange, stressed on that fact that for retail investors 100 million is a massive amount and bringing down this minimum requirement to Rs100,000 for retail investors would help set the system in motion. Aside from liquidity, the success retail level government bond trading depends on the extent to which banks are lured into the retail market. As part of the market making process, incentivizing banks and brokers is the ticket. In the case of banks, promoting government securities is in direct conflict with banking system’s primary aim of strengthening the deposit base that yields decent spreads. In Naqvi’s views, banks with international presence can be prompted to bring in expatriate Pakistanis to invest in government securities which o�er secured returns. While the procedure to open up a SACRA account continues to be a snag, smoothing out the process by opening up mirror accounts here for expatriate Pakistanis having bank accounts with these banks in abroad can be a quick fix. This can reduce the burden of going through KYC requirements of both countries for such Pakistanis. The move can also spur banks to further their relationships with Pakistani origin people as they can o�er a package of services to their investors including remittances, deposits, and government securities. NEXT STEPSWhile luring in the banks is indeed a good idea, it is not enough. It is a general observation that investors are more comfortable investing in bank deposits and national savings schemes. One obvious explanation is that these investment avenues are well recognised among investors. Bank deposits are generally preferred over government securities even though bank deposits yield negative returns in real terms. While, in the case of national savings schemes, encashment prior to maturity leaves the investor paying a high cost in terms of penalty. In the current scenario, where yields on risk-free government securities are lucrative enough, aggressive marketing campaigns on the part of capital market institutions and the government is needed to encourage retail investors to consider government securities as an alternative investment avenue. Also, basic financial literacy programmes aimed at raising awareness about the importance of investing in financial products as part of savings should be initiated. At the same time, there is a need to look beyond banks, where the government should induce other big players in the market to engage in as market makers. Experts argue that government-owned entities such as State Life, pension funds, EOBI that hold large chunks of government securities in their portfolio to trade a certain percentage through BATs system. Involving these participants will reduce government’s depend-ence on banking system to maintain liquidity in the market. Also, the realization of technological world has to set in. To this end, development of alternative distribution channels to

target retail segment can make the grade. In this era, when smart phones have taken the lead, providing online access can ensure e�iciency and a�ordability of the investment process. Kenyan government has realised the need to go beyond conventional mediums and is aiming to introduce Treasury Mobile Direct (TMD) to tap the savings of average Kenyans as the government wants more investors to participate in raising funds under its public-to-private partnership programmes (See box for key features of Kenyan model).

The listing of government securities is just one ingredient. The journey to building a well-rooted debt capital market is long and strenuous, where success depends on properly filling the gaps present in the existing mechanism. Once the right structure is in place, the government needs to have a far-sighted vision to build a vibrant debt market. This includes coming up with a transparent auction calendar, borrowing in di�erent tenors to create a longer-term risk free yield curve, of say 20 to 30 years, focussing on expanding insurance, pension and mutual fund industries to widen the pool of long-term investors. In this regard, a collective e�ort by Ministry of Finance, State Bank of Pakistan and Securities and Exchange Commission of Pakistan is required to lay out a comprehensive plan.

Key initiatives taken by Kenyan government to widen retail base

1. Requirement for pension funds and insurance companies to invest up to 70 percent of their assets in government securities helped evolve a new segment that invests in medium to long term investments.

2. Reduction in minimum investment requirement for treasury bills and bonds from Ksh.1,000,000 for both to Ksh.100,000 and Ksh.50,000 respectively. This encouraged retail investors to invest in government securities and turned out to be a success with over 17,000 new CDS accounts being over the last 4-5 years.

3. Providing ease of access to retail and corporate investors to the auctions and the Central Bank as fiscal agents do not charge any fees to the investors.

Government bond trading on local bourse

Rabia Lalani

The writer is a Research Analyst at Business Recorder.

Flat MCR preventing niche banking growthHussain Lawai | President, Summit Bank

Page 15

BR Research: How will 2015 be di�erent for the bank than the previous year?Hussain Lawai: 2014 was a good year for us and overall the banking sector performed quite well. However, 2015 is a challenging year because of a gradual reduction in discount rate, which will a�ect the net interest margin. So we are gearing up for that. In 2014, we opened only one branch as we had a deliberate focus on consolidation and conversion to Islamic banking. Setting up a branch requires 12-15 months and Rs200-250 million in funding. Since we had been incurring losses in yesteryears, we made a conscious decision to first consolidate our operations and then expand the network.

BRR: How did the bank’s deposits evolve in the outgoing year?HL: We had no significant deposit growth in the outgoing year and there are a couple of reasons for that. Firstly, when we began operations there was a heavy reliance on large deposits. At that time, our top 20 depositors accounted for about 45 percent of total deposits. Within four years we brought that tally down to 29 percent. Moreover, a single depositor cannot be more than five percent of total deposits now. Secondly, big ticket depositors always ask for relatively higher returns. Bringing in smaller depositors lets the bank control that cost. We started with an average cost of funds of about 11 percent. We have brought that down every year since then. So the reason that the total deposits have not grown significantly is our focus on restructuring or re-profiling the deposit mix and a significant reduction in the cost of funds.

BRR: Where will the bank set up new branches in 2015?HL: We will be targeting areas where we are not already present, predominantly in urban areas. There are still many underserved areas within urban areas. For instance, within Karachi, the area of Sohrab Goth is home to a population of over 300,000 people. Yet there are only three bank branches in that entire locale. So we will be focusing our expansion e�orts in such locales.

BRR: Other banks have set up smaller branches with limited operations in many places. Can a similar strategy be expected from Summit Bank?HL: Our policy is that a branch should not be less than 1000 square feet. Moreover, we want to make all services available in each and every branch so that the customer experience is never compromised. We don’t say no to our

customers. This philosophy requires that every branch must have at least six or seven well trained personnel and ample physical space available.

BRR: What is the bank doing on alternate delivery channels?HL: We have limited branchless banking but we are a very strong IT player and our ATCs are well developed. We are number six in home remittances. We were the first to o�er Western Union users the ability to transfer money into any bank account across the country.

BRR: Please elaborate on the bank’s strategy for this year.HL: It takes six months to adjust rates o�ered to depositors. Then you have to pay at least KIBOR-3 to all depositors. So we have set a target for cost of funds at five percent that we want to achieve this year and we will do this by increasing the size of current accounts. We never focused on consumer products in the past but this year we have allocated about five percent of our portfolio for consumer loans, especially auto and mortgage. Then we will also be focusing on trade finance and going away from project finance. With the discount rate coming down, we will be able to o�er a�ordable loans at floating rates. We expect auto and consumer loan demand to pick up in coming months. We will not be going into credit card business.

BRR: What is your expectation for the discount rate this year? Do you foresee market rates trending lower than the policy rate?HL: I think the discount rate will settle between six and seven percent. Market rates will not be much lower than that. That happened for a short period and currently the global circumstances are quite di�erent. I also don’t foresee double digit interest rates within the next 2-3 years.

BRR: Will this be a tough year for banks?HL: The challenges in 2015-16 will be primarily due to thinner spreads. The central bank has also made it amply clear to the banks that gross spreads must come down under 4.5 percent. The cost of funds is close to 3 to 3.5 percent. We make another 1.5 to 2 percent through non-interest income. But in Pakistan, banks need extra cushion against non-performing loans as we have a higher incidence than the world in general. We as an industry are dealing with about 16 percent NPLs while in India the same is just four percent. So you need higher spreads to be able to manage in such circumstances. The SBP is always open to discourse based on facts and we are hopeful that our submissions will be given due consideration.

BRR: What is your take on the KASB bank fiasco?HL: My personal opinion is totally di�erent than what has happened. Historically, the SBP has always managed to merge troubled banks with a large bank instead of putting a moratorium on withdrawals from that bank. This move sent a mixed signal that shakes the confidence of depositors in the system. People don’t view it as a problem confined to one bank, rather they interpret it as an issue for the industry. In the initial three weeks of that moratorium, there was such a reaction among some depositors and it a�ected banks like us who were not compliant with MCR and CAR requirements were

also a�ected but we complied with those requirements within 2 to 3 weeks and hence did not su�er. We su�ered a drop of 5 to 6 percent in deposits but recovered soon after.

BRR: Do you think MCR requirement is misplaced and focus should be more on CAR?HL: My view on MCR is di�erent from that of the SBP. In my view, capital requirements on MCR should be related to the activities that a particular bank wants to embark on. By applying a standard requirement for all banks, all banks are pushed to work on similar business models instead of pursuing niche banking. We started with a strong focus on trade finance but in time we had to reach out into consumer banking and other areas simply because the MCR require-ment drove us there. If my bank is showing good performance to its sharehold-ers in existing business lines then it is easy to access addition-al funding to expand bank o�erings. But asking for an advance of a sizeable amount of money simply to meet a requirement can be cumbersome for investors. It takes time to build a healthy portfolio and establish your credentials in domestic and international markets. The central bank made a very good move where it set a lower capital requirement of Rs6 billion along with a time table, for setting up a subsidiary Islamic bank. This concession to existing banks lets them convert their existing conventional branches or launch a subsidiary bank.

BRR: What plans are afoot on Islamic banking?HL: We have already started the process of converting to Islamic banking and thus far two branches have been convert-ed to Islamic banking. The changeover will be slow initially as we have to bring major changes to our core banking system which is based on conventional banking principles. We have started that process, having received proposals from di�erent vendors. By July this year, we will select a vendor and commence implementation by October. We will be fully operational with that new core banking system by December 2015. Once that implementation is complete, the changeover will pick up pace. We are going to open new branches which will all be Islamic branches and we will also convert 20 existing branches to Islamic branches by the end of this year. By the end of 2017, the entire bank will become an Islamic bank. We conducted a survey prior to this decision and found that an overwhelming majority of our depositors support the conversion to Islamic banking even though Islamic banks do not o�er the same rate of return to depositors. The outstand-ing NPLs will be parked in one or two branches that will remain on conventional mode.

BRR: What should the industry target collectively in this year?HL: Banks will have to diversify their portfolios and target the private sector. The growth that we are witnessing demands better human resources. We need to collectively develop better resources for the industry to be able to meet the demands of consumers. Our strategy at Summit Bank will be: measured growth, a switch to Islamic banking and focus on improving skills of our teams.

In this interview with BR Research, Hussain Lawai talks about how he plans to turn his bank around, especially the plans to gain footing in Islamic banking industry, and how he thinks slapping a flat MCR requirement across the industry is preventing the growth of niche banking industry in the country. Below are edited transcripts.




Dr. Saeed Ahmed

SBP’s role in the transform of microfinanceFinancial access helps the low income households and small businesses better manage their a�airs; it spurs local econom-ic activity and at a macro-level, the depth of financial intermediation is associated with faster economic growth and lesser inequality. In the past 15 years, financial access for the low income people has moved from a niche issue pursued by few social entrepreneurs to an important global development agenda. During this time, regional variations notwithstanding, a field focused initially on microcredit broadened first to microfinance, then to access to finance, and most recently to financial inclusion. Although a late starter in microfinance, Pakistan has kept pace with changing global trends in policy and practice, and the State Bank of Pakistan’s role has been pivotal in steering the sector with a strategic vision and pursuing a systemic approach in developing the microfinance sector on sound footings. Microfinance in Pakistan has come a long way since 2000 and has witnessed gradual mainstreaming into the formal banking system. Ten microfinance banks (MFBs) have been established in the country, in addition to non-regulated (credit only) institutions, reflecting private sector participation and institutional diversity. During this period, we have seen a major transformation of microfinance from a subsidy-depen-dent sector into a dynamic industry providing a broad range of financial services to the financially excluded segments through self-sustaining business models and demand-driven products, while adopting high standards of governance and service delivery. Pakistan was the first country in South Asia to have issued a microfinance law (Microfinance Institutions Ordinance 2001) which paved the way for creation of second

tier banks to serve the low income segments of the society which were excluded by mainstream commercial banks. This law widely contributed to the development of the sector and provided legislation for NGOs to transform into SBP supervised deposit taking to protect the depositors and to safeguard these institutions against political and other outside interferences.

As a regulator, SBP introduced specialized microfinance policy and regulatory framework pioneering global best practices. These regulations and supervisory mechanism strengthened the enabling environment to help MFBs develop viable business models to realize sustainable growth in microfinance. The success of microfinance regulations and market development in Pakistan is widely acknowledged by

the international community. Our microfinance regulatory framework has been ranked No. 1 in the world by the Economist Intelligence Unit (EIU) of the Economist Magazine in its reports in 2010 and 2011, and third best in its annual reports for 2012 and 2013. From the beginning, SBP institutionalized dialogue with the industry through formal consultative groups. The feedback of the stakeholders has not only helped SBP in creating sound and balanced regulations, but also allowed building of various constructive partnerships towards financial inclusion. Microfinance consultative groups also contributed significantly towards formulation of national strategies on microfinance. In 2007, SBP spearheaded the National Microfinance Strategy which recognized four essential areas of action to revive the microfinance sector; commercialization, sustain-ability of operations, private domestic capital and the building of the human resource base. Under the strategy, SBP played a leading role in institutional reforms in key institutions such as legal conversion and divestiture of shareholding in Khushhali Bank, and transformation of NRSP into a MFB. To encourage transformation of NGOs into MFIs, in June 2007 Pakistan allowed a five year income tax holiday to MFBs, and facilitated two globally largest MFIs i.e. ASA and BRAC to start their operations in Pakistan from the year 2008. To provide critical and long-term support to microfinance strategy of 2007, SBP negotiated funding assistance from the UK’s Department for International Development (DFID), which shared common development goals, to implement a large “Financial Inclusion Program (FIP)”. The program was designed to address industry bottlenecks and create market

based funding for self sustenance of microfinance institutions to ease liquidity constraints of microfinance providers (MFPs). SBP initiatives under FIP led to significant improvement in market infrastructure for microfinance. Today the sector has microfinance specific CIB to address the problem of multiple borrowings and over indebtedness. A credit guarantee facility has been put in place which helped largely in building the confidence of commercial banks on the microfinance sector and has mobilized around Rs13 billion from commercial banks and capital markets / retail investors for onward lending to around 650,000 micro borrowers. The facility has helped develop the market and introduced poor borrowers to mainstream financial institutions. This SBP facility changed the way donor funding was previously used to support microfinance institutions. In addition, institutional strengthening support has been provided to the MFPs which has not only developed their HR but also improved their systems and controls; developed and implemented strategies for mobilization of savings, strengthened governance and internal controls functions, launched branchless banking initiatives, and transformed NGO-MFIs to MFBs. Also, a Nationwide Financial Literacy Program was launched to educate the low income strata about basic financial concepts. Such as inclusive market development greatly contributed to the successful evolution of microfinance banking in Pakistan. As the sector evolved, SBP strengthened the regulatory framework with enhanced focus on financial stability, State Bank revised the Minimum Capital Requirement (MCR) for microfinance banks (MFBs) in 2011 while allowing the existing MFBs to raise the prescribed minimum paid-up capital in a phased manner over the next three years. This step ensured that only such sponsors venture to establish MFBs which have adequate financial resources to meet the present and future capital requirements in the face of growing demand for investments in technology, intensive infrastructure, and information systems. In another signifi-cant development, SBP introduced a microenterprise loan category in the year 2012 to promote enterprise lending and improve asset creation in the country. Under this category, microfinance banks were able to lend up to Rs500, 000 to microenterprises. To overcome geographical barriers in financial inclusion and reduce costs, SBP issued branchless banking (BB) regulations in the year 2008. This initiative catalyzed important branchless banking deployments in the country and resultantly the retail network of microfinance has arisen overwhelmingly through agents and mobile phone channels. Now let us look at the impact of the aforesaid initiatives, most of which have taken place since 2007. Back in December 2007, the industry comprised of only six MFBs with total equity of Rs3.4 billion, 150,000 deposi-tors, and nearly a million borrowers availing microcredit (including 435,000 borrowers of MFBs). The micro-banking industry was struggling to achieve scale and sustainability, and faced a dearth in human resources to foster growth. Furthermore, MFIs and MFBs could not avail commercial funding to finance their loan portfolio due to perceived risks in microfinance businesses. Seven years down the road, the sector is today catering to more than 3.24 million borrowers (as of Sep 2014) out of which MFBs’ share is 1.155 million. Depositors have grown to 5.734 million in Dec 2014, with average yearly growth of 69 percent. Most importantly, compared with meager Rs2.8 billion in Dec 2007, total deposits of MFBs are touching Rs43 billion with an average annual growth rate of 47 percent. The deposits have actually exceeded the gross loan portfolio of Rs37 Billion (as of Dec 2014), suggesting long-term funding sustainability for MFBs. Loans/advances of MFBs have registered an average annual growth rate of 35 percent during this period to capture 60 percent share in the sector’s gross loan portfolio. The micro-banking industry holds equity of nearly Rs15 billion (as of December 2014) from just Rs3.4 billion in December 2007. Now average loan size has increased from Rs10,000 in December 2007 to Rs32,000 in December 2014; promising asset creation whereas previous-ly some critics found the low average loan size meant for

supporting consumption smoothening. This growth has led to improved ROE from negative 33.2 percent in December 2007 to positive 7.2 percent in December 2013, fetching both domestic and foreign equity injections in the industry. In the area of branchless banking, eight fully-functional models have emerged including pioneer ‘EasyPaisa’ by Tameer Microfinance Bank which was launched in 2009, ‘MobiCash’ by Waseela MFB/Mobilink in 2012, and ‘‘UPaisa’ by U Microfinance Bank and U-fone in 2013. Easypaisa is the third largest branchless banking model in the world. With innovative use of technology and partnerships, these models have started changing the economics of ‘banking with the poor’. Pakistan is experiencing phenomenal growth in the number of branchless banking transactions which have been undertaken at thousands of small shops situated in the streets and local markets across the country to serve common people at convenient time. Average monthly volume of such transactions is estimated to be around 24

million; and these are mostly bill payments, domestic remittances, and government-to-person (G2P) payments. Average size of these transactions is only Rs5,000 which shows that technological solutions are helping to reach out the millions of previously financially excluded segments of our society. Besides financial and operational performance of microfinance and branchless banking, we have also seen the impact of SBP reforms on market structure and governance model of microfinance industry. Today microfinance market is characterized by healthy competition, led entirely by strong private sector players, growth of diversified financial services, and emergence of innovative business models. All the MFBs are privately owned and reflect diversity of ownership and approaches to microfinance banking. Considering that the market has potential and the regulatory framework is supportive, the ownership in MFBs has flowed in both from local and international investors including banks, development agencies, investment funds, mobile network operators, and large domestic MFIs. Today the

MFBs have strong governance mechanisms in place with private and dynamic ownership. The weak institutions have been bought by experienced international investors and now they are emerging as strong players under the new ownership with strong capital footing. Benefitting from well-timed and far-sighted market based regulatory approach; the microfinance sector in Pakistan has matured now and is geared to grow into a burgeoning industry aimed to attain rapid scale. The e�ectiveness and success of all SBP initiatives hinged on dynamism stemming from microfinance operators themselves and the role of the private sector has undoubt-edly remained proactive and essential for innovating change in the industry. Even though the catalyzing function of SBP has helped to propel growth of microfinance in the country, SBP has also remained prudent in its regulatory approach to manage systemic risks which have been demonstrated in neighboring microfinance markets.

With strong commitment of the Government, SBP’s strategic vision, sound legal and regulatory foundations, robust market infrastructure, technological and institutional innovations, and private sector dynamism, the trajectory of microfinance is set for achieving the long term vision of “financial inclusion for all”.

In the area of branchless banking, eight fully-functional models have emerged including pioneer ‘EasyPaisa’ by Tameer Microfinance Bank which was launched in 2009, ‘MobiCash’ by Waseela MFB/Mobilink in 2012, and ‘‘UPaisa’ by U Microfinance Bank and U-fone in 2013

Financial access helps the low income households and small businesses better manage their a�airs; it spurs local econom-ic activity and at a macro-level, the depth of financial intermediation is associated with faster economic growth and lesser inequality. In the past 15 years, financial access for the low income people has moved from a niche issue pursued by few social entrepreneurs to an important global development agenda. During this time, regional variations notwithstanding, a field focused initially on microcredit broadened first to microfinance, then to access to finance, and most recently to financial inclusion. Although a late starter in microfinance, Pakistan has kept pace with changing global trends in policy and practice, and the State Bank of Pakistan’s role has been pivotal in steering the sector with a strategic vision and pursuing a systemic approach in developing the microfinance sector on sound footings. Microfinance in Pakistan has come a long way since 2000 and has witnessed gradual mainstreaming into the formal banking system. Ten microfinance banks (MFBs) have been established in the country, in addition to non-regulated (credit only) institutions, reflecting private sector participation and institutional diversity. During this period, we have seen a major transformation of microfinance from a subsidy-depen-dent sector into a dynamic industry providing a broad range of financial services to the financially excluded segments through self-sustaining business models and demand-driven products, while adopting high standards of governance and service delivery. Pakistan was the first country in South Asia to have issued a microfinance law (Microfinance Institutions Ordinance 2001) which paved the way for creation of second

tier banks to serve the low income segments of the society which were excluded by mainstream commercial banks. This law widely contributed to the development of the sector and provided legislation for NGOs to transform into SBP supervised deposit taking to protect the depositors and to safeguard these institutions against political and other outside interferences.

As a regulator, SBP introduced specialized microfinance policy and regulatory framework pioneering global best practices. These regulations and supervisory mechanism strengthened the enabling environment to help MFBs develop viable business models to realize sustainable growth in microfinance. The success of microfinance regulations and market development in Pakistan is widely acknowledged by

the international community. Our microfinance regulatory framework has been ranked No. 1 in the world by the Economist Intelligence Unit (EIU) of the Economist Magazine in its reports in 2010 and 2011, and third best in its annual reports for 2012 and 2013. From the beginning, SBP institutionalized dialogue with the industry through formal consultative groups. The feedback of the stakeholders has not only helped SBP in creating sound and balanced regulations, but also allowed building of various constructive partnerships towards financial inclusion. Microfinance consultative groups also contributed significantly towards formulation of national strategies on microfinance. In 2007, SBP spearheaded the National Microfinance Strategy which recognized four essential areas of action to revive the microfinance sector; commercialization, sustain-ability of operations, private domestic capital and the building of the human resource base. Under the strategy, SBP played a leading role in institutional reforms in key institutions such as legal conversion and divestiture of shareholding in Khushhali Bank, and transformation of NRSP into a MFB. To encourage transformation of NGOs into MFIs, in June 2007 Pakistan allowed a five year income tax holiday to MFBs, and facilitated two globally largest MFIs i.e. ASA and BRAC to start their operations in Pakistan from the year 2008. To provide critical and long-term support to microfinance strategy of 2007, SBP negotiated funding assistance from the UK’s Department for International Development (DFID), which shared common development goals, to implement a large “Financial Inclusion Program (FIP)”. The program was designed to address industry bottlenecks and create market

based funding for self sustenance of microfinance institutions to ease liquidity constraints of microfinance providers (MFPs). SBP initiatives under FIP led to significant improvement in market infrastructure for microfinance. Today the sector has microfinance specific CIB to address the problem of multiple borrowings and over indebtedness. A credit guarantee facility has been put in place which helped largely in building the confidence of commercial banks on the microfinance sector and has mobilized around Rs13 billion from commercial banks and capital markets / retail investors for onward lending to around 650,000 micro borrowers. The facility has helped develop the market and introduced poor borrowers to mainstream financial institutions. This SBP facility changed the way donor funding was previously used to support microfinance institutions. In addition, institutional strengthening support has been provided to the MFPs which has not only developed their HR but also improved their systems and controls; developed and implemented strategies for mobilization of savings, strengthened governance and internal controls functions, launched branchless banking initiatives, and transformed NGO-MFIs to MFBs. Also, a Nationwide Financial Literacy Program was launched to educate the low income strata about basic financial concepts. Such as inclusive market development greatly contributed to the successful evolution of microfinance banking in Pakistan. As the sector evolved, SBP strengthened the regulatory framework with enhanced focus on financial stability, State Bank revised the Minimum Capital Requirement (MCR) for microfinance banks (MFBs) in 2011 while allowing the existing MFBs to raise the prescribed minimum paid-up capital in a phased manner over the next three years. This step ensured that only such sponsors venture to establish MFBs which have adequate financial resources to meet the present and future capital requirements in the face of growing demand for investments in technology, intensive infrastructure, and information systems. In another signifi-cant development, SBP introduced a microenterprise loan category in the year 2012 to promote enterprise lending and improve asset creation in the country. Under this category, microfinance banks were able to lend up to Rs500, 000 to microenterprises. To overcome geographical barriers in financial inclusion and reduce costs, SBP issued branchless banking (BB) regulations in the year 2008. This initiative catalyzed important branchless banking deployments in the country and resultantly the retail network of microfinance has arisen overwhelmingly through agents and mobile phone channels. Now let us look at the impact of the aforesaid initiatives, most of which have taken place since 2007. Back in December 2007, the industry comprised of only six MFBs with total equity of Rs3.4 billion, 150,000 deposi-tors, and nearly a million borrowers availing microcredit (including 435,000 borrowers of MFBs). The micro-banking industry was struggling to achieve scale and sustainability, and faced a dearth in human resources to foster growth. Furthermore, MFIs and MFBs could not avail commercial funding to finance their loan portfolio due to perceived risks in microfinance businesses. Seven years down the road, the sector is today catering to more than 3.24 million borrowers (as of Sep 2014) out of which MFBs’ share is 1.155 million. Depositors have grown to 5.734 million in Dec 2014, with average yearly growth of 69 percent. Most importantly, compared with meager Rs2.8 billion in Dec 2007, total deposits of MFBs are touching Rs43 billion with an average annual growth rate of 47 percent. The deposits have actually exceeded the gross loan portfolio of Rs37 Billion (as of Dec 2014), suggesting long-term funding sustainability for MFBs. Loans/advances of MFBs have registered an average annual growth rate of 35 percent during this period to capture 60 percent share in the sector’s gross loan portfolio. The micro-banking industry holds equity of nearly Rs15 billion (as of December 2014) from just Rs3.4 billion in December 2007. Now average loan size has increased from Rs10,000 in December 2007 to Rs32,000 in December 2014; promising asset creation whereas previous-ly some critics found the low average loan size meant for

supporting consumption smoothening. This growth has led to improved ROE from negative 33.2 percent in December 2007 to positive 7.2 percent in December 2013, fetching both domestic and foreign equity injections in the industry. In the area of branchless banking, eight fully-functional models have emerged including pioneer ‘EasyPaisa’ by Tameer Microfinance Bank which was launched in 2009, ‘MobiCash’ by Waseela MFB/Mobilink in 2012, and ‘‘UPaisa’ by U Microfinance Bank and U-fone in 2013. Easypaisa is the third largest branchless banking model in the world. With innovative use of technology and partnerships, these models have started changing the economics of ‘banking with the poor’. Pakistan is experiencing phenomenal growth in the number of branchless banking transactions which have been undertaken at thousands of small shops situated in the streets and local markets across the country to serve common people at convenient time. Average monthly volume of such transactions is estimated to be around 24

million; and these are mostly bill payments, domestic remittances, and government-to-person (G2P) payments. Average size of these transactions is only Rs5,000 which shows that technological solutions are helping to reach out the millions of previously financially excluded segments of our society. Besides financial and operational performance of microfinance and branchless banking, we have also seen the impact of SBP reforms on market structure and governance model of microfinance industry. Today microfinance market is characterized by healthy competition, led entirely by strong private sector players, growth of diversified financial services, and emergence of innovative business models. All the MFBs are privately owned and reflect diversity of ownership and approaches to microfinance banking. Considering that the market has potential and the regulatory framework is supportive, the ownership in MFBs has flowed in both from local and international investors including banks, development agencies, investment funds, mobile network operators, and large domestic MFIs. Today the

MFBs have strong governance mechanisms in place with private and dynamic ownership. The weak institutions have been bought by experienced international investors and now they are emerging as strong players under the new ownership with strong capital footing. Benefitting from well-timed and far-sighted market based regulatory approach; the microfinance sector in Pakistan has matured now and is geared to grow into a burgeoning industry aimed to attain rapid scale. The e�ectiveness and success of all SBP initiatives hinged on dynamism stemming from microfinance operators themselves and the role of the private sector has undoubt-edly remained proactive and essential for innovating change in the industry. Even though the catalyzing function of SBP has helped to propel growth of microfinance in the country, SBP has also remained prudent in its regulatory approach to manage systemic risks which have been demonstrated in neighboring microfinance markets.

With strong commitment of the Government, SBP’s strategic vision, sound legal and regulatory foundations, robust market infrastructure, technological and institutional innovations, and private sector dynamism, the trajectory of microfinance is set for achieving the long term vision of “financial inclusion for all”.

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

To overcome geographical barriers in financial inclusion and reduce costs, SBP issued branchless banking (BB) regulations in the year 2008



When Saudi Pak Industrial and Agricultural Investment Company was rebranded as Silk Bank in June 2009, the institution announced SME and consumer financing would remain its strategic foci. Five years since that makeover, the bank is seen as an active lender in the private sector against a landscape where most banks prefer to park their funds in government securities. All banks complain that the legal framework in the country makes it di�icult for banks to chase down loan defaulters through onerous repossession laws, lack of clean property titles and other issues. Silk Bank is leading the charge on legal reform to make private sector lending feasible and manageable by banks. An appeal by the bank relating to changes in repossession laws was turned down by the courts and is pending review by superior judiciary. In a recent interview with BR Research, the architect behind the bank’s emergence and former Finance Minister Shaukat Tarin insisted that “legal reform is a prerequisite to vibrant private lending by the banks”. He stated that the task of improving banking sector laws warrants the attention of the government as well as the frontline regulator.

In his opinion, the central bank has so far “used the same yardstick for all banks, irrespective of their size, advance-to-deposit ratio or other considerations.” Tarin asserted that capital adequacy requirement and the imposition of minimum savings rate has hurt the smaller banks disproportionately without reining in the big banks that have resorted to lazy banking practice of parking majority funds in government securities. Commenting on the moratorium imposed on KASB Bank, Tarin stated that the move “created a scare for the smaller banks as large depositors were jittered and some ran for what they perceived to be safer options at larger banks.” He opined that the situation may have been handled better had the central bank first injected the requisite capital, replaced the bank’s top brass and then invited larger banks to acquire its operations.

INDUSTRY CONSENSUS NEEDEDWhether it pertains to reassessing capital adequacy regulations for banks, encouraging private sector lending or addressing other challenges facing the sector; the former finance minister expressed the need for a consulta-tive approach whereby the banks, regulator and other stakeholders must build consensus for reform. “Most banks have done reasonably well in 2014, but the same cannot be said for the banking industry; its growth and e�icacy to the national economy,” he contended, pointing out that sector wise and regional imbalances in lending persist, maturity profiles of banks’ assets and liabilities remains severely misbalanced and no significant attempts are afoot to bring the unbanked sectors and populations into the regulated fold. The issues highlighted by the banking industry veteran are a damning revelation of the sector’s dismal showing as financial intermediates: “SME lending has dropped to half of where it was some years ago, consumer financing is only around seven percent of all lending and agriculture financing is also stagnant at similar levels. The banks are the main conduits to support business activity, yet their

contribution (private lending) is only about 18 percent of GDP. Clearly we need to rethink the purpose of banking.” The former finance minister is perturbed by the recent spike in issuance of PIBs, which the banks have been all too grateful to pick up. “In a declining interest rate scenario, issuing long-term paper at near double digit rates is imprudent,” he said. He opined that the debt management division has to be resurrected at the finance ministry which must work with the central bank to establish a trading floor “so they manage the country’s debt professionally.”

REFORM OF ARCHAIC BANKING LAWSExtolling the virtues of such an arrangement, he said that not only would the government save hundreds of millions of rupees in the government’s cost of borrowing, but

would also help develop a long-term yield curve that can be used as a benchmark for other long-term lending such as mortgages and private lending at large. “Creating rental and developmental REITs for the government and securitizing of other debts will be possible through the debt management division,” he said. So how can we push banks towards financial intermedi-ation in a situation where the government is reliant on banks for its borrowing needs? Tarin contended that the SBP should set limits on the proportion of PIBs they are allowed to keep on their books, hence driving them to seek investors; so the banks may sell the same securities to them. “When we introduced the PRI in 2009, it envisioned three steps, the first of which was channeling workers’ remittances. Although remittances have risen exponential-ly, the subsequent step was securitizing government debt to be sold to expatriates; but that has still not come to pass,” he stated. Even the banks that want to actively lend to consumers face di�iculty on account of unsupportive legal environ-ment. “Unless we have strong and actionable recovery laws, the banking sector lending to SME sector, housing sector and the private sector at large, will remain stunted,” he stated. But banking laws are not the only panacea for consum-er lending. Tarin asserted that in the early 2000s, most banks rushed into consumer lending without developing the requisite internal controls; “acquisition, administra-tion, maintenance and recovery are three legs of the consumer lending stool and no bank can grow its consumer side sustainably without properly developing each of these expertise.”

TOUGH TIMES AHEAD? The industry veteran asserted that most banks chose to disband their consumer lending operations in recent years; relying solely on corporate and government lending instead. Declining rates will push banks to beef up consumer lending once again, but Tarin expressed fear that the banks may again jump into the fray without implementing their lesson learnt from the previous bout of higher consumer lending. Quizzed over the sector’s expected performance in upcoming quarters, Tarin opined that few banks that have remained active in consumer lending will stand to gain while the rest of the sector will see earnings trend lower.

SBP should cap banks’ PIB investmentsShaukat Tarin | Chairman Silk Bank

“The central bank has so far used the same yardstick for all banks, irrespective of their size, advance-to-deposit ratio or other considerations”



“2014 marked numerous achievements for DIBPL. On the financial side, the bank reported a year-end pretax profit growth of 337 percent year-on-year. Furthermore, a 24 percent deposit growth was achieved in comparison to 2013,” said Junaid Ahmed kick-starting the conversation. DIBPL’s current market share in Islamic Banking Industry is seven percent and the CEO shared intentions of taking it higher in the coming years. “We added 50 new branches in 2014 in the quest to expand our presence all across Pakistan. With these new branches, Dubai Islamic Bank is now operating in 222 locations including branchless operations,” further added Junaid. Drawing attention to the fact that the balance sheet crossed the Rs100 billion-mark in 2014, he said “The numbers depict a tremendous 30 percent growth in deposits and 66 percent growth in financing assets.” “We have formalised our internal strategy for five years based on the strategy guidelines by the State Bank of Pakistan,” added Junaid, o�ering a peek in the near future. Recall that the central bank wants to see the Islamic banking industry as 20 percent of the total banking industry in five years – a claim that has the a�irmative nod from most Islamic bankers including the DIB Pakistan CEO. Asked about the readiness of DIB to catch up with the expected boom in Islamic banking, Junaid opined that DIB Pakistan has done its homework and has aligned its strategies with those of the SBP. “We presented our budget to the board and have gotten the approval for the same for 2015,” said a confident Junaid. The DIB Pakistan CEO is wary of the challenges that lie ahead in 2015, but appears ready to take it on. “The current year may well be a tough one, but we are all geared up to face it and come out winners,” said the CEO. The sti�est challenge in Junaid’s opinion is thrown in by the fast declining discount rates. “When the discount rates go down, the rate on deposits do not go down proportionately. The financing assets all have 90-180 days maturity, so when the asset gets matured, it is re-priced at the new discount rate, because majority of the assets are at floating rates,” Junaid elaborated the challenge that the discount rate poses. The well versed CEO emphasized the importance of balance sheet growth both on the asset and liability side, in

order to counter the challenging scenario. “We will have to have new products, new areas, more contribution from non-funded income besides ensuring that the newly opened branches at least breakeven soon,” reads Junaid’s wish list for the near future. DIB Pakistan is also looking at a visible strategic shift in terms of its asset composition. For a bank of its size, it is nothing short of incredible that DIB Pakistan is currently the market leader in auto financing, booking around Rs600-700 million worth of auto financing every month.

The visible interest for consumer segment further strength-ens as the CEO sheds further light on mortgage financing, which is an oft-neglected consumer banking segment in Pakistan. Junaid said that the bank is doing monthly mortgage financing to the tune of Rs150-200 million. “We have a very strong due diligence and scrutiny criteria,” Junaid quickly added to dispel rising NPLs doubts that the bank is fully aware of the fact that spreads are going to be under pressure for much of 2015 as discount rates are coming down. “At times because of the shortage of assets in the Islamic banking fraternity, the customers ask for better rates,” said Junaid lamenting the fact that the Islamic banking industry continues to be deprived of more investment avenues to deploy assets, and has to be competitive in terms of rate to the commercial banks. “We cannot a�ord to charge penalty in case of late payments from customers, unlike commercial banks who have this opportunity,” Junaid said explaining how it is tough to be competitive all the time.

Junaid also touched upon the age old issue of banking courts and foreclosure laws, hoping that once resolved it would result in a much more e�icient banking industry. “At times when installments get delayed because consumers have the shelter, we can get frustrated and ask for repayment of the principal amount only, and that too, at discount, at times,” said the CEO. To DIB Pakistan’s credit, despite high exposure on the consumer side, the non performing loans are well in check, which Junaid attributes to prudence. “We have got systems and processes in place which help us enhance our consumer portfolio while managing and controlling the risk at the same time”. DIB Pakistan’s NPL at 2.4 percent is the best in the industry by some distance, and that too, while being market leaders.Unlike most bankers, Junaid is confident that the private sector borrowing demand will also grow as government is putting in e�orts in construction and power sectors.“The GDP growth is there, and a lot of it will come from the manufactur-ing sector, which is why the credit demand will always be there,” said Junaid. “We have challenges, but the situation is definitely improving.” Junaid went on to say that the only available instrument for Islamic bank is Sukuk, but because of lack of assets, even that is not fully capitalised on. “We are in talks with the govern-ment and there is some initial response from their side”. On the infrastructure project, over Rs400 billion worth projects are already in operation and newer ones are coming, especially large dams. “We want to create a product within the Islamic structure where we can do Sukuk on those assets. We are trying to do Sukuks on highways”. “DIBPL aspires to be the leading Islamic Bank in the industry through branch expansion, introduction of innova-tive and comprehensive products, e�ective compliance and cost control measures, induction of qualified Islamic banking professionals, implementation of state-of-the-art banking system, maintaining complete transparency and high ethical standards in its dealings with customers.”

We have got systems and processes in place which help us enhance our consumer portfolio while managing and controlling the risk at the same time

Interview by Zuhair Abbasi

2014 marked numerous achievements for us

Dubai Islamic Bank (DIB) was established in 1975 as the world’s first Islamic Bank. DIB is the 5th largest Islamic bank in the world. Dubai Islamic Bank Pakistan Limited (DIBPL) is a wholly-owned subsidiary of DIB. It commenced operations in Pakistan on March 28, 2006.

BR Research met Junaid Ahmed, CEO, Dubai Islamic Bank Pakistan Limited (DIBPL) to discuss matters surrounding Islamic banking industry in general and DIB Pakistan in specific. Following is a brief excerpt of the conversation.

Junaid AhmedCEO Dubai Islamic Bank Pakistan Limited (DIBPL)

Demand for Islamic products is much greater than supply

“It is very heartening to see that wherever we open a new branch, Alhamdulillah, peoples’ confidence in us is evident from the large number of accounts that start opening from the very first day and the branch gains business momentum right from the begin-ning.” President & CEO of Meezan Bank, Irfan Siddiqui told BR Research. Starting o� as an investment bank in 1997, Meezan Bank became a commercial bank by acquiring the local operations of Societe Generale in 2002. Since then, it has exhibited mushrooming growth; growing from 4 branches in 2002 to 428 branches in 2014. The Bank organically added 60 new branches to its network during the year 2014 alone. “We witnessed 25 percent deposit growth in 2014” Irfan Siddiqui said, adding that “we plan to open 122 branches in 2015”. All 428 branches of Meezan Bank are online, allowing customers to conveniently conduct their banking transac-tions at any of its branches. The Bank also has a network of 352 ATMs across the country. The landmark transaction for Meezan Bank in 2014 was the acquisition of HSBC Pakistan, which consisted of ten branches across the country. Asked whether the acquisition of a conventional bank was a tricky task for an Islamic bank, Siddiqui recalled the Bank’s beginnings; “Our very first acquisition at the time we entered Commercial banking was Societe Generale; this was when we were just converting from an Investment bank and had a very small team. Today we are even better-equipped to manage such transactions. Our Shariah Advisory team is now so strong that we provide consultancy to other banks and businesses for converting their opera-tions to Shariah-compliant lines. Our team was very particular in ensuring that all HSBC transactions are converted into completely Shariah-compliant modes.” He spoke about the Bank’s extensive Research and Develop-ment capability stating that, “Our guiding

principle is that as long as your underlying business is Shariah-compliant, we will find a solution for all your banking needs.” The recent acquisition of HSBC Pakistan operations by Meezan clearly shows that there has been a massive change in people’s perception about Islamic banking and it is being chosen by the customers as a viable alternative to conventional banking. “There was minimal attrition in the HSBC deposits” said Siddiqui, adding that many individual depositors expressed eagerness to utilize other banking products beyond bank deposits. Speaking broadly, he asserted that “Islamic banks have played a major role in attracting people to the banking sector who had otherwise avoided banks”. He also highlighted that Meezan Bank is among the market leaders in both car finance and housing finance in Pakistan, which shows that customers are showing a general a�inity towards financing through Islamic modes.

“Today, Meezan Bank comprises almost half of the Islamic banking market of the country. When we started, there were 38 banks and we were the smallest. Now we are the eighth largest bank in the country.” Meezan Bank’s CEO expressed confidence that the size of the Islamic banking industry will continue to grow rapidly as more banks enter the market. “The Ministry of Finance and SBP are committed to the development of Islamic banking” he said,

adding that increased competition will “improve infrastructure and expand the list of product o�erings available with Islamic banks.” The relatively young brick-and-mortar presence of Meezan Bank already boasts average deposit per branch of close to Rs800 million. Siddiqui informed that, “We are a very cost-conscious bank and our return on equity ranks among the top three in the industry.” Given its asset size of Rs400 billion - half of all deposits held by Islamic banks in the country are on Meezan Bank’s books. When it comes to growth, Meezan Bank is not restricting itself to the brick-and-mortar approach and will be venturing into branch-less banking as well. “We have applied for a branchless banking license and our target is to commence these services within this year”, Siddiqui told BR Research. O�ering details, he said that the Bank will use the existing networks of agents to provide services to clients and that the Bank’s research teams are already working on key modalities for expanding these networks. Meezan Bank is also “following with the central bank to introduce an Islamic equiva-lent of PIBs”. According to Siddiqui, three-year Sukuks, which are currently the longest tenor government paper available to Islamic banks, are re-priced every six months, e�ectively making these “six-month instruments”. He said that the availability of longer tenor paper will allow Islamic banks to o�er competitive rates to long-term depositors. Concluding the discussion, he said that the role of government as well as the apex regulator will remain crucial in development of the Islamic banking industry and that given the huge demand for Islamic financial services in the country, the coming years will be marked by its increasing proportion within the overall banking and financial industry of the country.


“Meezan Bank comprises almost half of the Islamic banking market of the country”

As the leading Islamic Bank in Pakistan, Meezan Bank’s success is no secret. With a strong Vision and a passionate team, Meezan has jumpstarted a nascent Islamic Banking industry and has made it a significant mainstream player in just 12 years. Islamic Banking now constitutes 10% of the entire banking industry of Pakistan and is growing faster than the conventional banking segment. We met with Irfan Siddiqui, President & CEO of Meezan Bank to speak about Meezan Bank’s strategy and its role in growing the Bank and the industry itself. Below are excerpts from this very interesting conversation

Irfan Siddiqui Founding President & CEO Meezan Bank



The State Bank has been harshly criticized on the imposition of moratorium on KASB in the last quarter of 2014. The market pundits argued that it has shaken the confidence of depositors in the regulator as a lender of last resort and has disturbed the equilibrium of financial system. The paid up capital of the bank, net of losses, was mere Rs1.3 billion as of September end and massively short of regulatory requirement of Rs10 billion. Yes, there was an urgent need to resolve this issue of low capital adequacy of the bank and a more thought through decision would have been to facilitate selling the bank to any banking or non-bank-ing institution. That was the initial plan and two big banks were doing the due diligence. There was nothing wrong with the asset portfolio of the ill-fated bank. The issue was of Rs20 billion deposits (1/3 of total) of Iranian origin upon which the interested parties were seeking letter of comfort from SBP; but the regulator was not keen to provide so. The SBP could have rather rescued the bank itself. It had the reputation of bailing out ailing banks and the institution has done it number of times - post privatization and deregu-lated regime when couple of banks had worse circumstances but the regulator came to the rescue. Allied Bank was one of the most corrupt banks and its delinquent assets were more than healthy portfolio after it was privatized; SBP took hold, cleaned it and handed it over to a professional party which transformed the bank. A recent example of a virtually doomed bank is that of Bank of Punjab which was also inflicted by a corrupt management and had huge bad debts owing to some willful defaults and excessive risky lending. But Government of Punjab injected equity in it and the SBP allowed it to not publish its accounts for almost three years and in the end the bank came out with a clean slate from running tens of billions of losses to an equity base of Rs15 billion by now. One may wonder what stopped SBP from bailing KASB out whose worries are of a lesser magnitude than the above mentioned examples. There is a financial stability board (SBP/SECP joint taskforce on financial conglomerate) which was constituted on the advice of ADB in 2009. The question is why the authorities have not engaged that board before coming up with such a harsh decision. 92 percent of depositors (73,000 customers) having collectively Rs2-3 billion in deposits at KASB got the right to withdraw their holdings. While the rest of Rs40 billion (12,000 or 8% of customers) are stuck across the country in 100 plus branches of the bank. These include corporate clients and individuals. Many of these clients have serious reservations but are not registering resentment as they fear tax authorities may harass them once they come on radar. Who is to safeguard interest of these persons? Is there any depositors’ protection policy prevailing? Unfortunately there is none. The policy was formed in 1974 to safeguard depositors under the limit of Rs100,000 with state owned banks while today’s reality is di�erent as majority of banks are owned by private players and there is absolutely no mechanism but the people trust SBP to take care of depositors. Such a step is shocking and tends to sway the people’s saving from the formal banking system and especially from other small banks. One way to proceed could have been to use Rs24 billion of liquid investment assets of KASB (T-Bills –Rs16bn, PIBs-Rs7bn, listed equity shares and TFCs Rs1 bn) and Rs22 billion of clean

advances portfolio for releasing Rs40 billion of deposits stuck. Why can’t the top five banks having cumulative investment portfolio of Rs2.6 trillion buy Rs24 billion on the direction of SBP? Or why can’t the government-owned National Bank buy the good portfolio of KASB to keep stability of the financial system? But that did not happen. Now more than four months after the issuance of moratorium, the fate of the KASB Bank is still in limbo. The owner has filed a case in high court to restrain SBP from selling the bank or lifting the moratorium in fear of a bank run. The KASB group has an apprehension that under the circumstances the bank would be sold at a throw away price and the shareholders would get nothing out of it. Then the Iranian government is pressurizing through diplomatic channels to release the deposits of its origin. Let’s see how the case proceeds. Nonetheless, the lessons to learn for depositors are to not be greedy and stop banking upon these small banks which are o�ering higher rates to incentivize marginal customer. We can advocate this and run public service messages and inform the depositors to look at the balance sheet of a bank before putting their savings in it. But by doing so, the life of small banks would become even more di�icult. Thus, the woes are not restricted to the seized bank but also have the potential to drain deposits from other banks which are meeting MCR on margin. How would these banks be able to attract deposits when they all are competing on the same turf with the big fish? The SBP needs to think out of the box and should restrict few small banks to a limited mandate. There is a dual purpose of doing so; one is to make small banks attractive and other is to enhance the banking penetration. The financial inclusion remained a dream in an economy with only 10 percent of population having unique bank accounts while the currency in circulation (money out of the system) is double that of regional countries. There are two main risk indicators of a bank’s financial health – minimum capital requirement and capital adequacy ratio. Only two percent of banking system is not complying with the latter indicator as the MCR has improved significantly in the past few years because of banks’ higher concentration in government’s risk free assets and that is not of grave concern. A better strategy would have been to redirect banks which are on the fringe of MCR to focus on a region or a sector to create niche in respective areas. The idea is to enhance the outreach of banks and that can be done by redirecting weak banks into specialized areas and that would not only reduce banks’ risks but also allow them exposure in less competitive and untapped markets. This happens in the rest of the world and Pakistan should be no di�erent.

The lessons to learn for depositors are to not be greedy and stop banking upon these small banks which are o�ering higher rates to incentivize marginal customer

Lessons from KASB episode

Ali Khizar

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

Page 15

SMEs are our main focusTahira Raza | President & CEO First Women Bank Ltd

FWBL was set up as a result of the a�irmative action of the Parliament in 1989 with a paid up capital of Rs100 million as a public sector bank. Subsequently SBP raised the minimum capital requirements (MCR) for all scheduled commercial banks to Rs10 billion. However, this requirement was fixed at Rs3 billion for FWBL in February 2014 jointly by SBP and the Ministry of Finance; the major shareholder of the bank with 72 percent stake. The latter also injected Rs1billion into the bank last year, whereas MCB, HBL, NBP, UBL & ABL together hold 28 percent stake in FWBL. The misrepresentation of material information by media in the wake of the moratorium on KASB Bank negatively impacted FWBL. Sections of the media wrongly reported that FWBL was also liable to meet the MCR requirement of Rs10 billion. This caused a spur for the bank at a critical time of annual closing. Unfortunately the bank was hit by large NPLs which require a large amount of provisioning in 2014 which is one of the major reasons for loss, while other contributing factors include high administrative cost, high cost of deposits and leakage of income. Hence addressing these challenges is the primary focus at present. The bank’s president opined that our market does not appreciate risk return relationship and the customers ask for bids to place deposits with the highest bidders not realising the high return o�ered may be associated with higher risk. She explained that “since we are a public sector bank which is potentially low risk we are not part of this race. It is part of our strategy to replace high cost funds with funds at the declared rates with much diverse customer base. This is a slow process but is doable.” “Our consistent focus is on improving the bottom line by targeting specific controls and business development which are supporting the business growth” informed the bank’s president. Commenting on the current banking environment she said that at present government paper is not only least risky, it also o�ers relatively high return. On the other hand, the private sector is becoming more risky due to grave energy crisis, security issues and low human resource capacity. “Therefore we see a reverse situation of ADR & IDR” she said adding that “laws governing recovery of loans and the decision process in courts also a�ect banks’ motivation to lend to private sector”. Switching gears to comment on the bank’s intended focus in the year ahead, the bank president informed that as a strategic move FWBL is repositioning itself as a bank for the people focussing on:

1. Small saving mobilisation

2. Lending to small businesses (S of SME Sector)

3. Bringing diversity to customer base as well as to its employees while meeting commercial objectives

4. Focusing on need assessment and aligning product development with such needs

5. Developing strategic alliances

6. Focusing on capacity building of the sta� and other resources

7. Dispelling the misperceptions about the bank

Common misperceptions about FWBL include:

• That FWBL provides concessional loans and services as against being an e�icient, competitive and customer friendly bank.

• The bank is primarily to lend to improve women access to credit as against the fact that it is to mobilise savings, sell need base commercial products including loans.

• Belief that women can be beneficiaries of banking services only if they take loans for business purposes. All women cannot be entrepreneur, just like every man cannot venture into business.

Highlighting the bank’s intent to improve financial access and services for women, she informed that a program will soon be launched in collaboration with USAID. “We will conduct research in the vicinities of our branch locations, to gather data on demographics, savings, banking services needed by them. Once the need assessment is complete we will develop appropriate products” said Ms. Tahira Raza. The bank is also pioneering within the realm of human resource management. “We are working to introduce flexible working hours for women” she informed adding that “women have to undergo patches where they have to leave the job for some time but this operates to their disadvantage if they want to re-enter the job market”. She expressed confidence that flexi hours policy will help retain valuable team members over

their productive careers. Ms. Raza called for more govern-ment attention towards similar initiatives to help improve financial/ economic inclusion across gender. “Our branch network extends to 41 branches and its expansion will be based on the availability of required capital. We are also deliberating on options for expansion other than investing in physical infrastructure and are considering network expansion using e-platforms” she said. The bank is also embarking on “multidimensional training programme for capacity building within the organisation”. This programme will be administered with the support of national and international experts.

“Our deposits have started picking up gradually and we have readjusted our KPIs to being in more quality deposits. On the asset side of Rs9 billion, nearly one-third is commodity financing, being a public sector bank. We are sitting on Rs1.4 billion NPLs which are on the higher side, but we are making e�orts on the recovery” she concluded.

Interview by Zuhair Abbasi


Ms. Tahira Raza President & CEO First Women Bank Ltd., discussed the challenges confronted by the banking industry in general and FWBL in particular. Following are key takeaways from the conversation:

Tahira RazaPresident & CEO First Women Bank Ltd

“Our consistent focus is on improving the bottom line by targeting specific controls and business development which are supporting the business growth”


Sohaib Jamali

Lazy bankers? Really?Most senior bankers interviewed for this publication say that ‘there are too many banks in Pakistan’. Yet little money flows out of the o�ices of those whom Nassim Nicholas Taleb calls ‘dark grey suited serious looking’ lenders. The suave gentlemen are found busy investing in government papers instead and playing golf in the afternoon. But call them lazy bankers, a term Shahid Kardar once famously coined, and they will throw in a classic rebuttal: “look, we are here to make profits; we aren’t any charitable organisation. If something doesn’t make business sense; if the risk-reward ratio is not favourable, then we won’t do it.” The bankers are probably right. Central to most private sector credit issues in Pakistan are either structural concerns or legal problems, or both. Take, for instance, the case of agricultural and rural credit. As per the latest Economic Survey of Pakistan, agriculture economy was 21 percent of national GDP. Yet even after all the e�orts by the central bank, banking sector deposits from and advances to agriculture sector stood at a mere four percent each of the sector’s output. Or look into the livestock sector, which contributes half of agricultural GDP or about 12 percent of total national output. Yet by the end of June 2014, deposits from livestock sector were 0.37 percent of the sector’s GDP whereas advances to the sector were 1.4 percent of the total sector output. Who is responsible for this poor performance? Bankers will give you an earful of excuses. Agricultural or rural markets lack adequate credit information. Borrowers possess limited documentation in terms of proof of income. Operational costs are high due to relatively small size of transactions. Limited asset ownership to serve as collateral as well as lack of clear title and ancillary documentation is also problematic. Resting their case, bankers resignedly say they cannot solve these issues single-handedly. Talking about collateral, the lacunas in foreclosure and repossession/recovery laws and lack of clean titles have kept banks from doling out mortgage finances. That’s despite the bankers’ insistence that immense value is currently locked up in the real estate sector. Mortgage finance in Pakistan is at a mere 0.4 percent of GDP, whereas in India it’s about eight percent, in China its 20 percent, in Malaysia and Korea it is over 30 percent.

As a percentage of total private sector credit, Pakistani banks gave out 1.3 percent to house building as of June 2014 (down from 2.3% in Jun-06). Similarly, they extended three percent of the overall credit pie for “real estate, renting and business activities” as of June 2014, down from five percent, eight years ago. This is despite the fact that deposits from the latter have increased from eight percent of total business sector deposits to 12 percent during the same period. According to the central bank governor, the last time the

recovery law was amended was in 2002, which allowed banks to repossess properties in case of non-performance by the borrower. However, the Supreme Court shot down that empowerment in a later decision. “Now we are in a market where the recovery cases in banking courts can last 20 or even 50 years,” he said. So clearly, on this account, too, banks appear rather helpless. Then take the case of SMEs, which are by far the biggest employers of the country. Their portion in bank credit was about 8.5 percent of private sector credit by the end of June 2014 – nearly half of what it was in FY06. Or take the case of ‘wholesale and retail trade’ and ‘transport, storage and communications’. Their shares in GDP are 18.6 percent and 13 percent, respectively as of FY14. But deposits from and advances to these sectors - as a percentage of sectoral GDP - are dismal and have, in fact, dropped significantly between 2007 and 2014. However, you cannot fault the bankers if these sectors choose to remain out of the tax net and don’t hold proper documentation and clear ownership titles. Still, be that as it may, the lazy banker label sticks. Our dapper financiers have been profoundly lazy when it comes to pushing policy solutions and achieving wider outreach.

LAZY LOBBYISTSLack of clean property titles and unfavorable repossession laws are commonly-cited impediments to growth of mortgage financing. Yet it is di�icult to fathom how moneyed men of such proportions haven’t been able to build a case for better foreclosure and repossession/recovery laws. After all, most banks are owned by powerful business families, and banking profits have been so huge that they could even buy love. This lazy lobbying is evident from the fact that, over the last decade very little progress has been made on property

titles and repossession laws. It is true that few individual bankers have been genuinely trying hard to lobby for better laws. The banking association too has often had debates and discussions with the central bank as well as the government. But those e�orts seem to have been too little to be e�ective, which is understandable because banks really didn’t have any incentive to work hard on lobbying and wider public advocacy. It is only now – as Chairman NBP, Munir Kamal interviewed for this publication said – that changing broader economic conditions are forcing banks to lobby for all the improvement in laws. “They (banks) will do it now, because now it will become a matter of survival for the banks,” he said. Hopefully, this time they will follow through. And while they are at it, it would be a good idea for banks to use their clout and for once get a meaningful debate started on electronic media, considering that the matter in question pertains to wider audience including depositors, individual and corporate borrowers, and indeed the society at large.

BEREFT OF IDEASThe other form of laziness pertains to their failure to be innovative. They haven’t quite found a way around the problem of low banking penetration in farming & rural sector and exploring synergies for the same. When was the last time we saw a host of ideas for rural market penetration going boom and bust? Despite all the targets and nudging by the government and the central bank, advances to agriculture sector as a percentage of agricultural GDP decreased to four percent by FY14 from seven percent in FY07. Deposits from agricultural sector have also eased to four percent of the sector’s GDP from six percent, eight years ago. The banking industry may well be teeming with ideas. But very few would take the lead and invest in those ideas. Pitching one such idea, former SBP governor Salim Raza suggested in his article for previous year’s Banking Review that provincial banks should focus on agriculture and SME sectors and work in liaison with SMEDA.

Another idea is to work with or set up firms like Ruralasia Enterprise Services (Pvt.) Ltd. Incorporated in 2011 as a for-profit, private sector initiative, Ruralasia provides value-added services to the agriculture sector by acting as an intermediary between banks and rural sector borrowers. It facilitates agriculture and other rural businesses in marketing and also technological support. Because of its unique vantage point, the firm acts like a quasi-rural credit bureau as well as a sales agent and loan recovery firm, if and when the situation so arises. The firm

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

100%

200%

300%

400%

500%

600%

Jun-06 Dec-07 Jun-09 Dec-10 June-12 Dec-13

Govt (LHS) Private sector businesses (LHS) Personal (RHS)Trend in sector-wise advance-deposit ratio

Source: Calculations based on SBP sector-wise advance & deposit data

AgricultureLivestock

ManufacturingElectrcity generation & distribution &

gas distribution

Construction Wholesale & retail trade

Transport, storage &

communication

0

10

20

30

40

50

60

70

0 5 10 15 20 25

Share in GDP as of FY14

Ad

van

ces

(as

% o

f GD

P) F

Y14

Sectoral share in GDP vs. advances (% of sectoral GDP)

has its own database of registered clients for whom they can help provide a variety of loans ranging from Rs50000 to Rs20 million. Ruralasia’s founder and CEO Aijaz Nizamani says that his firm charges 2.5 percent from the borrowing client at the time of disbursement and two percent from the lending client when the loan has been paid back completely. While Ruralasia’s has mostly partnered with Trust Modaraba to help provide loans to its borrowing clients, it has recently signed an agreement with a mid-tier bank on similar arrangements. Why can’t the bankers explore these sorts of innovative solutions? Admittedly, as Husain Lawai, CEO of Summit Bank noted in this publication, blanket MCR requirements may be preventing niche banking for smaller banks. But that doesn’t give a clean chit to the whole of industry for not trying to come up with ways to work around the structural issues.

LAZY MARKETERSLastly, how is it that banks have been unable to bring noticeable results in conventional (brick and mortar type) financial inclusion despite a growth in branches. Going back to an earlier example, the wholesale and retail sector is about 18 percent of GDP – and a bulk of that is intuitively in urban areas and not rural. Yet deposit from and advances to the sector are, well, peanuts (See graphs). When was the last time you saw a mass-scale financial literacy/awareness programme being conducted by the industry? The Karachi Stock Exchange (KSE) is making more noise than bankers, for its investor awareness programmes. And they are getting results too. The KSE team is going from city to city in a planned, targeted fashion, conducting sponsored road shows to create investor awareness, aside from conducting below-the-line marketing activities.

Taking a cue from KSE, bankers also need to adopt a ‘going out and getting it’ strategy by holding banking awareness seminars in agricultural/livestock hotspots and SME hubs, while using the power of media at the same time. Banking is not a short-term, 5-10 year business; it’s a much longer play that hinges on increasing penetration. It is about investing time, money and energies on untapped industries and businesses to explore long-term potential by developing the market instead of punting in government bonds for quick gains. It’s about time bankers stop acting like stock-market boys and get real in banking.

AgricultureLivestock

Manufacturing

Electrcity generation & distribution &

gas distribution

Construction

Wholesale & retail tradeTransport,

storage & communication

0

5

10

15

20

25

30

35

0 5 10 15 20 25

Share in GDP as of FY14

Dep

osi

t (as

% o

f GD

P) F

Y14

Sectoral share in GDP vs. desposit (% of sectoral GDP)

6%

0.48%

17%21%

26%

9% 9%4%

0.37%

15%12%

31%

7% 6%

Ag

ricu

lture

Liv

esto

ck

Man

ufa

ctu

ring

Ele

ctrc

ity g

ener

atio

n &

dis

trib

utio

n &

gas

dis

trib

utio

n

Co

nst

ruct

ion

Wh

ole

sale

& re

tail

trad

e

Tran

spo

rt, s

torg

ae a

nd

com

mu

nic

atio

n

FY07 FY14Then & now: deposits as % of sectoral GDP


Most senior bankers interviewed for this publication say that ‘there are too many banks in Pakistan’. Yet little money flows out of the o�ices of those whom Nassim Nicholas Taleb calls ‘dark grey suited serious looking’ lenders. The suave gentlemen are found busy investing in government papers instead and playing golf in the afternoon. But call them lazy bankers, a term Shahid Kardar once famously coined, and they will throw in a classic rebuttal: “look, we are here to make profits; we aren’t any charitable organisation. If something doesn’t make business sense; if the risk-reward ratio is not favourable, then we won’t do it.” The bankers are probably right. Central to most private sector credit issues in Pakistan are either structural concerns or legal problems, or both. Take, for instance, the case of agricultural and rural credit. As per the latest Economic Survey of Pakistan, agriculture economy was 21 percent of national GDP. Yet even after all the e�orts by the central bank, banking sector deposits from and advances to agriculture sector stood at a mere four percent each of the sector’s output. Or look into the livestock sector, which contributes half of agricultural GDP or about 12 percent of total national output. Yet by the end of June 2014, deposits from livestock sector were 0.37 percent of the sector’s GDP whereas advances to the sector were 1.4 percent of the total sector output. Who is responsible for this poor performance? Bankers will give you an earful of excuses. Agricultural or rural markets lack adequate credit information. Borrowers possess limited documentation in terms of proof of income. Operational costs are high due to relatively small size of transactions. Limited asset ownership to serve as collateral as well as lack of clear title and ancillary documentation is also problematic. Resting their case, bankers resignedly say they cannot solve these issues single-handedly. Talking about collateral, the lacunas in foreclosure and repossession/recovery laws and lack of clean titles have kept banks from doling out mortgage finances. That’s despite the bankers’ insistence that immense value is currently locked up in the real estate sector. Mortgage finance in Pakistan is at a mere 0.4 percent of GDP, whereas in India it’s about eight percent, in China its 20 percent, in Malaysia and Korea it is over 30 percent.

As a percentage of total private sector credit, Pakistani banks gave out 1.3 percent to house building as of June 2014 (down from 2.3% in Jun-06). Similarly, they extended three percent of the overall credit pie for “real estate, renting and business activities” as of June 2014, down from five percent, eight years ago. This is despite the fact that deposits from the latter have increased from eight percent of total business sector deposits to 12 percent during the same period. According to the central bank governor, the last time the

recovery law was amended was in 2002, which allowed banks to repossess properties in case of non-performance by the borrower. However, the Supreme Court shot down that empowerment in a later decision. “Now we are in a market where the recovery cases in banking courts can last 20 or even 50 years,” he said. So clearly, on this account, too, banks appear rather helpless. Then take the case of SMEs, which are by far the biggest employers of the country. Their portion in bank credit was about 8.5 percent of private sector credit by the end of June 2014 – nearly half of what it was in FY06. Or take the case of ‘wholesale and retail trade’ and ‘transport, storage and communications’. Their shares in GDP are 18.6 percent and 13 percent, respectively as of FY14. But deposits from and advances to these sectors - as a percentage of sectoral GDP - are dismal and have, in fact, dropped significantly between 2007 and 2014. However, you cannot fault the bankers if these sectors choose to remain out of the tax net and don’t hold proper documentation and clear ownership titles. Still, be that as it may, the lazy banker label sticks. Our dapper financiers have been profoundly lazy when it comes to pushing policy solutions and achieving wider outreach.

LAZY LOBBYISTSLack of clean property titles and unfavorable repossession laws are commonly-cited impediments to growth of mortgage financing. Yet it is di�icult to fathom how moneyed men of such proportions haven’t been able to build a case for better foreclosure and repossession/recovery laws. After all, most banks are owned by powerful business families, and banking profits have been so huge that they could even buy love. This lazy lobbying is evident from the fact that, over the last decade very little progress has been made on property

titles and repossession laws. It is true that few individual bankers have been genuinely trying hard to lobby for better laws. The banking association too has often had debates and discussions with the central bank as well as the government. But those e�orts seem to have been too little to be e�ective, which is understandable because banks really didn’t have any incentive to work hard on lobbying and wider public advocacy. It is only now – as Chairman NBP, Munir Kamal interviewed for this publication said – that changing broader economic conditions are forcing banks to lobby for all the improvement in laws. “They (banks) will do it now, because now it will become a matter of survival for the banks,” he said. Hopefully, this time they will follow through. And while they are at it, it would be a good idea for banks to use their clout and for once get a meaningful debate started on electronic media, considering that the matter in question pertains to wider audience including depositors, individual and corporate borrowers, and indeed the society at large.

BEREFT OF IDEASThe other form of laziness pertains to their failure to be innovative. They haven’t quite found a way around the problem of low banking penetration in farming & rural sector and exploring synergies for the same. When was the last time we saw a host of ideas for rural market penetration going boom and bust? Despite all the targets and nudging by the government and the central bank, advances to agriculture sector as a percentage of agricultural GDP decreased to four percent by FY14 from seven percent in FY07. Deposits from agricultural sector have also eased to four percent of the sector’s GDP from six percent, eight years ago. The banking industry may well be teeming with ideas. But very few would take the lead and invest in those ideas. Pitching one such idea, former SBP governor Salim Raza suggested in his article for previous year’s Banking Review that provincial banks should focus on agriculture and SME sectors and work in liaison with SMEDA.

Another idea is to work with or set up firms like Ruralasia Enterprise Services (Pvt.) Ltd. Incorporated in 2011 as a for-profit, private sector initiative, Ruralasia provides value-added services to the agriculture sector by acting as an intermediary between banks and rural sector borrowers. It facilitates agriculture and other rural businesses in marketing and also technological support. Because of its unique vantage point, the firm acts like a quasi-rural credit bureau as well as a sales agent and loan recovery firm, if and when the situation so arises. The firm

The writer is Research Editor at Business Recorder newspaper. He can be reached at [email protected]

5%

has its own database of registered clients for whom they can help provide a variety of loans ranging from Rs50000 to Rs20 million. Ruralasia’s founder and CEO Aijaz Nizamani says that his firm charges 2.5 percent from the borrowing client at the time of disbursement and two percent from the lending client when the loan has been paid back completely. While Ruralasia’s has mostly partnered with Trust Modaraba to help provide loans to its borrowing clients, it has recently signed an agreement with a mid-tier bank on similar arrangements. Why can’t the bankers explore these sorts of innovative solutions? Admittedly, as Husain Lawai, CEO of Summit Bank noted in this publication, blanket MCR requirements may be preventing niche banking for smaller banks. But that doesn’t give a clean chit to the whole of industry for not trying to come up with ways to work around the structural issues.

LAZY MARKETERSLastly, how is it that banks have been unable to bring noticeable results in conventional (brick and mortar type) financial inclusion despite a growth in branches. Going back to an earlier example, the wholesale and retail sector is about 18 percent of GDP – and a bulk of that is intuitively in urban areas and not rural. Yet deposit from and advances to the sector are, well, peanuts (See graphs). When was the last time you saw a mass-scale financial literacy/awareness programme being conducted by the industry? The Karachi Stock Exchange (KSE) is making more noise than bankers, for its investor awareness programmes. And they are getting results too. The KSE team is going from city to city in a planned, targeted fashion, conducting sponsored road shows to create investor awareness, aside from conducting below-the-line marketing activities.

Taking a cue from KSE, bankers also need to adopt a ‘going out and getting it’ strategy by holding banking awareness seminars in agricultural/livestock hotspots and SME hubs, while using the power of media at the same time. Banking is not a short-term, 5-10 year business; it’s a much longer play that hinges on increasing penetration. It is about investing time, money and energies on untapped industries and businesses to explore long-term potential by developing the market instead of punting in government bonds for quick gains. It’s about time bankers stop acting like stock-market boys and get real in banking.

FY07 FY14

Then & now: advances as % of sectoral GDP

Tran

spor

t, st

orga

e &

com

mun

icat

ion

7% 2%

82%

42%

25%11% 7%4% 1%

48%58%

11%4%

Ag

ricu

lture

Liv

esto

ck

Man

ufa

ctu

ring

Elec

trci

ty g

ener

atio

n&

dis

trib

utio

n &

gas

dist

ribut

ion

Co

nst

ruct

ion

Wh

ole

sale

& re

tail

trad

e

Source: Calculations based on SBP sector-wise advance & deposit data andEconomic Survey


67

23

1

1

1

3 5OTC value-mix (%)(Jul-Sep 2014)

Funds transfer

Utility and interet bill payment

Mobile top-ups

Loan repayments and others

Int'l home remittances

G2P through card

- 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000

1QFY122QFY123QFY124QFY121QFY132QFY133QFY134QFY131QFY142QFY143QFY144QFY141QFY15

Number of Accounts

Easypaisa55

, Omni, 20

Mobicash, 11

Mobile Paisa, 4

Upaisa, 4 Timepey, 3 MCB Lite, 2

Market share (%) by transaction volume(Jul-Sep 2014)

-

10

20

30

40

50

60

70

80

-

50

100

150

200

250

300

350

400

Value Rs (bn) Volume (mn)

Branchless Banking Transaction Mix

1QF

Y12

2QF

Y12

3QF

Y12

4Q

FY

12

1QF

Y13

2QF

Y13

3QF

Y13

4Q

FY

13

1QF

Y14

1QF

Y15

2QF

Y14

3QF

Y14

4Q

FY

14

Easypaisa, 48

Omni , 22

Mobicash, 17

Timepey , 5

Upaisa , 4 Mobile Paisa , 3 MCB Lite , 1

Market share (%)by transaction value(Jul-Sep 2014)

-20,00040,00060,00080,000

100,000120,000140,000160,000180,000

200,000

Number of Agents

1QF

Y12

2QF

Y12

3QF

Y12

4Q

FY

12

1QF

Y13

2QF

Y13

3QF

Y13

4Q

FY

13

1QF

Y14

1QF

Y15

2QF

Y14

3QF

Y14

4Q

FY

14

8

26

24

31

7 2

1 1M-wallet value-mix (%)(Jul-Sep 2014)

Funds transfer

G2P

Cash deposit

Cash withdrawal

Utility bill payments

Pensions

Mobile top-ups

Others

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Deposits-Rs (mn)

1QF

Y12

2QF

Y12

3QF

Y12

4Q

FY

12

1QF

Y13

2QF

Y13

3QF

Y13

4Q

FY

13

1QF

Y14

1QF

Y15

2QF

Y14

3QF

Y14

4Q

FY

14

Branchless banking at a glance