Pakistan has decided to sell 51% of the shares of Habib Bank to the Geneva-based Aga Khan Fund for Economic Development (AKFED) for about $400m in one of the country’s biggest privatisation deals ever, writes Farhan Bokhari.

According to Pakistani officials, AKFED agreed to pay 26% of the sale price upfront, while the rest would be paid in two years. Habib Bank, one of Pakistan’s three biggest public sector banks, is the second successful privatisation of a bank since United Bank last year. United was sold for more than $200m to a Pakistani expatriate businessman settled in the UK.

Habib Bank holds a 20% share of Pakistan’s banking sector. It has more than 1400 branches across 26 countries.

Habib’s privatisation is widely seen in Pakistan as a significant step toward moving banking – once largely dominated by the public sector – into the hands of the private sector.

Ishrat Hussain, governor of Pakistan’s central bank, The State Bank of Pakistan, said: “The whole purpose of privatisation [of banks] is to bring healthy competition to Pakistani banks. When you work for the government, you have no incentives to do anything. But if you are privately owned, you are under pressure to be competitive.”

Central bank officials believe that up to 80% of Pakistan’s banking will be in the hands of the private sector once Habib is privatised.

Analysts agree that banks would increasingly come under pressure to become more competitive. Sakib Sherani, chief economist at the Pakistan offices of Dutch bank ABN AMRO, said: “There are bound to be newrealities facing banks, in making a transition from a fully government-owned bank to being a private entity”.

Pakistani banks were nationalised in the early-1970s. But by the 1990s, publicly owned banks ran into recurring losses under the weight of mounting bad debts and widespread inefficiency.

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