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Asia-PacificFebruary 2 2005

Clear sense of direction

Pakistan’s banks have been facing up to privatisation and anti-money laundering measures and there are more challenges ahead. Farhan Bokhari reports from Karachi.
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Ishrat Husain, Pakistan’s central bank governor, regards the year ahead as an essential make or break period for the country’s smaller banks, which were given licences more than a decade ago. As part of a conscious policy, the central bank is encouraging smaller banks either to merge or expand to meet the requirements for a higher paid up capital.

In the next 12 months, such banks are faced with the challenge of raising their paid-up capital to a record Rs2bn ($33.4m) – up from Rs1.5bn in December 2004. It is yet another step in the central bank’s effort to see banks become larger with the passage of time.

“There’s nothing unusual about what is going on in Pakistan. Consolidation is the name of the game worldwide, where central banks are pressing banks to accept the reality that they have to grow and become robust players,” says Dr Husain, a former world bank economist appointed five years ago to head Pakistan’s central bank.

Better profile

In an interview with The Banker, Dr Husain is keen to emphasise that many banks have a clear sense of future direction. He has overseen a considerable turnaround in the profile of Pakistani banks that were saddled with large non-performing loans, a bloated workforce and widespread inefficiency. But the push from the Pakistani government to promote privatisation of banks has borne fruit.

The National Bank of Pakistan, which undertakes to perform important treasury functions for the government, is the only bank that remains in the public sector. Other giants, such as Habib Bank, United Bank, Muslim Commercial Bank and Allied Bank, the four best-known brand names in Pakistan, have all been privatised.

Dr Husain has also been at the forefront of calls for banks to clamp down on money laundering and financing of terrorist activities. Pakistan’s high-profile status as a key player in the so-called war on terror has additionally prompted the government to pressure banks in areas such as creating an improved “know your customer” environment.

In a sign of changing times, potential customers who want to open new bank accounts are often turned away by branch managers if documents establishing their identity are considered suspect. “We are trying to create a new environment as part of the global trend,” says Dr Husain.

Facing reality

Other important challenges for banks include facing up to an increasingly competitive environment after a substantial reduction in interest rates. In the past three or four years, average interest rates for borrowers have fallen to a range of 8%-11%, down from 18%-20% in the late 1990s.

The fall was in part driven by a sharp rise in key economic indicators, such as a substantial rise in liquid foreign currency reserves which, at about $12bn, are equivalent to 10-11 months of Pakistani imports. This is a dramatic shift from the times when reserves sank to $500m-$600m during the worst periods of balance of payment crises. Such low reserves forced successive governments to borrow more from foreign sources at exorbitant interest rates.

The lower interest rates have unleashed a rising consumer culture in Pakistan as small-time borrowers are taking an increasing number of loans. During the financial year July 2003-June 2004, the production and sale of new cars rose by more than 70% to exceed 100,000. The rise was due mainly to an increasing number of Pakistanis seeking fresh loans to buy a car.

“It is no longer a rich man’s pleasure to be mobile,” says Tariq Khalid, a young accountant in Karachi, pointing at his new car that had just rolled out of a company show room. According to Mr Khalid, a new consumer culture is on the rise in Pakistan as an increasing number of young people are keen to buy cars through a bank loan or loan from a leasing company.

Zakir Mehmood, president of Habib Bank – Pakistan’s largest bank, which was privatised early last year – believes there is widening business activity across Pakistan, all to the benefit of banks. “Producers of cars, textiles, telecom parts, cement and other industrial vendors are all increasing their output. With such activity comes increased demand for loans,” he says in an interview with The Banker.

Borrowing rises

Recent figures compiled by bankers suggest that Pakistani banks lent about Rs186bn to borrowers during the first half of the financial year July 2004-June 2005. That is modestly below the target of Rs225b for the whole year. “As you can see, there are lots of people looking to borrow,” says Mr Mehmood.

In a high economic growth environment, bankers like Mr Mehmood believe that the challenge for banks is the introduction of a large variety of improvements across the board, ranging from management structures to the introduction of new technologies. “Managing success is now a big challenge,” he says.

Others such as Mehdi Zaidi, a UK-based Pakistani consultant who periodically advises Pakistani banks on internal reforms, believes that areas such as human resource development have become increasingly vital for banks’ performance. “Traditionally, human resource development has not received the highest attention in Pakistani banks,” he says. “Now that the environment is changing rapidly, so are the considerations on how best to run a successful bank in Pakistan.”

Nasir Ali Shah Bukhari, chairman of privately owned Khadim Ali Shah Bukhari (KASB) Bank says: “In an increasingly competitive environment, the challenge for banks is to find their own niche areas of strengths where they can take on the competition.”

KASB Bank plans to almost double its number of branches across Pakistan this year from 21 to 40, as part of a robust expansion plan.

The KASB group made its mark initially as a successful venture in the Karachi stock market and subsequently diversified into other sectors, including information technology and banking. “Our niche is to finance trade as well as activities in the stock market. That is where our focus lies because that is where our group has most of its strength,” says Mr Bukhari.

He predicts that Pakistan’s economic upturn will continue to offer new opportunities for banks “as defined by each bank seizing the opportunity where it can find them”.

Despite such optimism, sceptics say that the future of Pakistani banks may still be shrouded in the confusion surrounding its economy, amid concerns over recurring political uncertainty. President Pervez Musharraf, the country’s military ruler, has been in power for five years and has overseen the latest economic uplift. But opposition politicians are critical of him for being the latest in a long line of military rulers who are consolidating the military’s role in running the country.

Broken promise

In December, General Musharraf broke his promise to step down as chief of the powerful Pakistani military and to continue to lead the country as a civilian president until the end of his present tenure in 2007. He justified his decision on the grounds that Pakistan, being caught up in the “war on terror”, faces unprecedented security challenges that required his presence on the scene.

“Many people would call this a self-serving decision,” says a senior Western diplomat in Islamabad. “The question for many is: can you sustain a high economic growth environment and do things like invite new large investments when opposition parties are agitating for the military’s exit from the scene?” he says.

Bankers say that many people in the business community were relieved to see General Musharraf continue to rule Pakistan, especially because his close ties to US president George W Bush’s administration were likely to continue yielding fresh economic assistance for Pakistan.

“The economy’s outlook in the near future is determined by what is happening in Pakistan right now and what would happen in the near future,” says the president of a public sector bank. “What is happening in Pakistan now brings comfort to many.”

Mixed reactions

On the streets of Pakistan, opinion is divided between largely strong optimists and a number of pessimists. In addition to prospective new car buyers such as Mr Khalid, others compliment the changing face of banks. One is Kamran Malik, a Pakistani bank officer who is back in the country on vacation from the nearby Middle East. “Even if some of the changes being witnessed in Pakistan have come through after 9/11, they include some very good changes,” he says.

He recalls the days when many clients came to him at his bank to ask for advice on how best to use the underground network known as hawala or hundee – a system in which money placed with an offshore money changer was handed to a recipient through a money changer in Pakistan.

The Pakistani government moved quickly after 9/11 to tighten controls on money changers. Among the provisions it introduced was the requirement for their books to be inspected regularly by inspectors from the central bank. In 2002, Pakistani money changers were also forced to seek licences from the central bank, effectively putting an end to unlicensed and unregulated businesses.

“Pakistan was previously suspected of being a prime destination for money laundering and terrorist financing,” says Mr Malik. “Now, the view has changed. As an example of the changing times, I don’t have people coming to me for advice on how best to use an underground channel to send funds back home.”

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