Pakistan’s new central bank governor began her tenure in January with promises to consolidate the sharp recovery of the country’s banks. Shamshad Akhtar, who is the first ever woman appointed to the position, could not have chosen a more appropriate time to return to Pakistan, following an illustrious international career with global developmental institutions spanning almost two decades.
Now her main challenge is to oversee the sharply improving fortunes of Pakistan’s banks as they face increasing demand for services that range from the needs of large corporate customers to those of individual consumers.
Pakistan’s banks continue to oversee rising profits – thanks in large measure to the country’s two-year-old economic recovery, which has generated optimism over the future of businesses, industries and the financial sector. In the past year, not a single Pakistani bank has reported profit growth of less than the previous year’s returns, according to Shujaa Rizvi, a senior equity analyst at Karachi’s Capital One securities brokerage house. He says: “What else could be a more visible evidence of the banks’ success story?”
Good impact
“Pakistan has really come a long way in these past few years. As the economy recovers, growth rates improve. There has, of course, been an impact on banks – a good impact,” says Ms Akhtar in her first interview with The Banker after taking charge at the central bank. Her comments are backed by evidence of a continuing flurry of activity surrounding banks, ranging from the demand from companies to fulfilling the needs of individual consumers such as new car buyers lining up to seek loans.
A visible, though anecdotal, piece of evidence comes from Jehangir Siddiqui, a Karachi-based brokerage house, in figures compiled for the first half of 2005. These reported that Pakistan’s commercial banks listed on the stock market achieved a growth in after-tax profits of 93% during that period, and after-tax profits rose 105% for the first nine months of last year. The figures for the second half of 2005 are expected to be made public in February and many analysts believe they will at least match the year’s first-half results.
The new trend marks a reversal from an ill-fated legacy of the 1990s when Pakistan’s public sector banks were all saddled with large bad debts, profits were weak and costs, such as staff salaries, were heavy.
That indebtedness came more than two decades after Pakistani banks were nationalised and then used as vehicles by governments to extend large loans to their political favourites.
“The change has come with Pakistan’s successful privatisation of banks,” says Mr Rizvi, referring to the completion of bank privatisation of banks that has left only National Bank of Pakistan under government ownership, to serve what finance ministry officials suggest are important treasury functions.
Sustainability concerns
However, recent pressures on the Pakistani economy have unleashed new concerns over the sustainability of large profits for banks as they enter a new year following months of consistently rising bills for national oil imports. Many economists have already lowered their forecast for the country’s economic growth during the current financial year (July 2005-June 2006) down to a range of 6%-6.5% from last year’s growth rate of just over 8%. This is in line with concerns over the economies of other key oil importing countries. “Pakistan’s economic slowdown is bound to influence the future of banks. You are unlikely to see the same profit margins in future that you saw last year,” says a senior western economist in Islamabad.
But more significant for the future of banks, according to other analysts, is the extent to which they can meet such important challenges as encouraging mergers to create fewer banks and compete against the possible entry of foreign banks into the Pakistani market. There is also the chance of more competition with India if the two south Asian neighbours one day embrace a more liberal attitude towards allowing the free opening of banks across their borders. “These three factors are by no stretch unimportant. They may be the key to the long-term future. As for the economy slowing down one year and recovering the next, that’s something which happens in countries,” says Sakib Sherani, Pakistan chief economist for Dutch bank ABN Amro.
Bankers say the increasing dominance of the market by privately owned banks has begun making a qualitative difference to how banks see their role in the country’s business world. Unlike the years when banks were a tool for patronage, bankers say private managements are determined to resist any suggestions of patronising politically well connected clients.
Bad old days
“In the past, banks ran up huge bad debts because they were government-owned. A senior banker could find himself under extreme pressure and eventually losing his job when he did not comply with the wishes of somebody useful,” says the former head of a Pakistani bank who served in one public sector bank in the 1990s.
Ms Akhtar believes that the recovery of the economy and banks still leaves the country to face important challenges – essentially the price of success. “Structurally, the economy has changed in the past few years. We have to manage these changes and we need to be very good, very competitive,” she says, comparing the present-day environment with the years of a dominant public sector.
Businessmen warn that the central bank and the Pakistani government must consider actions in the near future to encourage a reduction of interest rates, which have been rising in the past eight months after falling to historic lows from the end of 2003 until early 2005. The chairman of a textile company – which he says has usually been among the most sought after borrowers due to its history of paying its dues to banks on time – compares the difference now and then: “At the best of times just two years ago, I was able to negotiate a 5%-7% interest rate. Now, if I receive a 10% rate from my bank, that would be very good.”
Western economists believe a key challenge for Pakistan’s banks in the year ahead is to reduce operating costs rather than strain depositors or borrowers with falling or rising interest rates. “At some point, the task for the central bank would be to consider how far banks are essentially observing fair intermediation costs. You can easily fall into a pattern; they are charging either more than they should from borrowers or giving less than they can to depositors. Here, the central bank has to brush up one important side of its regulatory function – how much is a reasonable profit for banks and when does it all start becoming ridiculous?” says the western economist in Islamabad.
Central bank officials say that tracking the profitability of banks is likely to be an important consideration for Ms Akhtar, who previously served as a director general at the Manila-based Asian Development Bank, where her tasks included monitoring quality of life for the most vulnerable sections of society in her designated territory. Following her acceptance of the central bank assignment in December, Ms Akhtar said publicly that her challenges not only include overseeing a further consolidation of Pakistan’s sharply rising bank profits but also addressing areas such as the development of microfinance as a vital arm of banking.
Social issues
“As a governor, Shamshad Akhtar has a key role in important monetary functions but I expect her to pay a lot more attention to some of the more important social issues facing Pakistan,” says one central bank official. “The central bank’s role is of course important in the financial sector and commercial markets but we can’t ignore the fact that almost one third of Pakistan’s population lives below the poverty line,” he adds.
Despite such challenges, Ms Akhtar is encouraged by such positive trends as the continued support of comfortable liquid foreign currency reserves, which at the equivalent to about eight to nine months of imports, have taken Pakistan to a position of relative comfort compared with the frequent balance-of-payment crises of the 1990s. But then, it is a trend that is just one of a series of new realities for Pakistan, as the country moves from its era of public sector-dominated banking to one where most of its banks are owned by the private sector.
