Banking System in Pakistan

    Banking System in Pakistan

Financial Sector:

 Financial Sector in Pakistan possesses a wide spectrum of financial institutions -Commercial banks, specialized banks, national savings schemes, insurance companies, development finance institutions, investment banks, stock exchanges, corporate brokerage houses, leasing companies, discount houses, micro-finance institutions and Islamic banks. They offer a whole range of products and services both on the assets and liabilities side. Financial deepening has intensified during the last several years but the commercial banks are by far the predominant players accounting for 90 percent of the total financial assets of the system. Unlike many countries, foreign banks can have 100 percent ownership, can open their branches or establish local subsidiary with full ownership. Foreign companies are also provided level playing fields as they can raise finances of all types and tenures from the domestic banking system.

BANKS:

Banks are financial intermediaries. The role of a financial intermediary is to sell its own obligations and to buy the obligations of others. By endowing its obligations with attractive features, an intermediary can sell its obligations at a higher price than it has to pay for the obligations it buys. Or to say the same thing in a different fashion, it can market its obligations at a lower interest rate than it can command the obligations it buys. The spread between the interest rate it pays on its own obligations and the one it receives on the obligations of other expenses of doing business must then be deducted. The net profit after these other deductions represents the return to the shareholders for their participation in the activity of a financial intermediary.

PAKISTAN BANKING OVERVIEW PAKISTAN BANKING SECTOR-PAKISTAN FINANCIAL HUB

The Banking sector is an integral part of the country’s financial services industry. The sector witnessed a phenomenal growth in 2001-03 where deposits rose by almost100%. There are 39 scheduled banks (including 11 foreign banks) operating in Pakistan. Competition is relatively high, especially after the challenging capital adequacy benchmarks set by the State Bank of Pakistan to nourish a stable banking system. Attracting foreign investment and winning profitable customers are the only options left to banks for survival.

The industry is passing through a transitional period from long established patterns and norms to the unknown land of threats and opportunities. And what will demarcate the banking organizations that will turn every change into an opportunity, taking the bull by the horns using the art of change management successfully from the losers. These are some of the daunting questions which will pose a challenge to the potential future banking brains but flowing are a few areas of banking industry where the wind of change is presently quite visible.

1.      Increasing diversity within the commercial banking industry

Diversity is making the head way at a rapid speed pattern of operations, market focus, advertising emphasis and use of information technology.

2.      Intensifying pressure of competition

Competition is scaling new heights in the banking industry and it will gain further force. A number of factors are expanding the frontiers of competition in both funding and asset use.

     3. Profit trends in banking industry

Current key ratios indicate a striking upward trend in the banking industry with huge banking spreads, particularly during the last half decade.

     4. Soaring loan losses

Provision for loan losses is on the rise over the years. Troubled loans or non performing advances are regarded as a cancer for banking industry. It can be said that quality loans is the ultimate goal for bankers today.

Structure of the Banking Sector

Pakistan being a developing country and having a relatively low level of income, is required growth rate is low as there is hardly any savings. The standard of living along with the quality of life is the newer concept in Pakistan which emphasizes on individual aspects of human nature. Structure of the Pakistani banking sector has substantially changed in the last decade, particularly following the privatization of the state-owned banks. In 1990, the banking system was dominated by five commercial banks which were all state-owned. During the first round of reform, two of the state-owned banks, Muslim Commercial Bank (MCB) and Allied Bank (ABL), were privatized between 1991 and 1993. The reforms process was subsequently delayed for several years and resumed significantly only in the early 2000s. With the privatization of the third large bank, United Bank (UBL), in2002, the domination of the state-owned banks was ended. Habib Bank (HBL), completed its privatization n process in February 2004. As a result of this privatization, the share of banking system assets held by public sector commercial banks decreased to less than 25 percent. The largest bank in the country, National Bank of Pakistan (NBP), with a market share of approximately 20 percent, remains state-owned and its privatization prospects are uncertain at this stage, although the government divested approximately 25 percent of its capital in 2001-03. Efforts have been made in recent years to promote Islamic banking services. In particular, the State Bank of Pakistan (SBP) exempted Islamic commercial banks from the moratorium on the establishment of new banks, and the first full-fledged Islamic bank, Meehan Bank, was licensed in 2002. Several conventional banks have also opened branches that provide only Islamic financial services. The size of these Islamic banking institutions.

               Anatomy of Banking Sector (Classification of Pakistan’s Banking Sector)

Pakistan’s Banking Sector can be classified under the following broad categories

Category	Description
State Bank of Pakistan	Central Bank and the Autonomous and Governing Body for all banking operations in the country
Nationalized Scheduled Banks	These deal primarily in industries of banking and capital   markets. They offer a host of unique policies, banking training, services and products  which include loans, credit cards, savings and consumer banking
Private Scheduled Banks	Banks engage in channeling funds from depositors to lenders against the primary objective of acquiring profit i.e. Bank Spread
Foreign Banks	These concentrate primarily on International Trade Finance, Innovative Credit Orientation and Plastic Money
Development/ Cooperative/Investment Banks	Investment Banks act as underwriter or agent serving as   intermediary between an issuer of securities and the investing public
Specialized Banks	These banks are created with specific interest thus specializing and catering to a particular sector industry .

CREDIT CARDS:

In recent years, credit cards have emerged as the fastest growing portion of the consumer segment. Since 2004, the outstanding credit card amounts have almost doubled. The card-per-person ratio of 0.01 suggests a large untapped potential in this segment. The latest entrant in this segment was MCB. The growing demand despite the rising lending rates indicates the growing demand for credit cards. The availability of information about credit cards is limited. Banks are extremely reluctant to share information such as interest income from cards, merchant fees, rollover rates etc. The central bank too does not provide the desired detail.

      

          ° Auto loans:

DEVELOPED PRODUCT IN THE CONSUMER SEGMENT THE MOST

Auto loans comprise the second largest category of the consumer segment. This segment saw an upsurge in 2005 as demand for transport in the country picked up. The low rates at that time significantly helped create this demand spurt because it made cars suddenly more affordable. Although the growth rate reduced in 2006, auto loans remained the largest contributor in terms of absolute growth. A number of new players have entered this field. FABL, UBL, MCB and BAFL are some of the players in this field. We consider this an attractive segment for future, although it may not be as profitable as the credit card business.

° Personal loans:

PERSONAL LOANS ARE RELATIVELY UNDER DEVELOPED

Personal loans category has the largest share in the overall consumer segment. This is a result of the absence of a(her customized products, which forces consumers to resort to personal loans. In future, we expect this category to be broken down further into specialized consumer products.

Banks have been swamped with demands of risk free lending from the government, bulging levels of non-performing loans, drying up of genuine business projects and a general risk aversion amongst the bankers. Pakistan’s financial sector liberalization in general and privatization of banks in particular has largely been hailed by experts on account of professionalization, financial inclusion and penetration of banks. Since 2009, the State Bank of Pakistan has maintained ‘financial soundness indicators’ of the banking system. These parameters include capital adequacy, assets quality, earnings and liquidity. The most recently released “Statistics of the Banking System” actually erodes the goodwill that has been associated with a liberalized banking industry. The banking system is becoming more unsound, less profitable, more expensive, more liquid and more toxic. Has the mantra of deregulation, denationalization and privatization failed?

      My hypothesis is that the banks of all categories have been increasingly swamped with demands of risk-free lending from the government, drying up of genuine business projects and a general risk aversion amongst the bankers. Banks of all creeds share a similar fortune to varying degree now.