THE

BANKING
INDUSTRY
OF
PAKISTAN

1
HISTORY OF BANKING INDUSTRY : PRE -
PARTITION
-Before partition, the only bank run by the Muslims of the sub-
continent
was Habib Bank which was established in 1941

-Adamjee with the assistance of Isphanisestablished Muslim

Commercial
Bank a few months before the creation of Pakistan in Calcutta

-When Pakistan came in to being The HabibBank shifted its

Headquarters
from India to Karachi

-The establishment of the National Bank of Pakistan in 1950 on

the
pattern of Imperial Bank of India was yet another milestone in
the
banking history of Pakistan.

- In September 1949 the rupee value was

reduced against the Pound sterling which was a major event in
the
banking circles.
2
HISTORY OF BANKING INDUSTRY : FROM 2002
to 2006
Banking sector turned profitable in 2002. Their profits rose for the
next five years and peaked to Rs 84.1 ($1.1 billion) billion in 2006

Privatization played and important role. (E.g HBL)

Middle Eastern and European Banks started operations in the country .

E.g Barclays, RBS (ABN Amro takeover), Dubai Islamic Bank, Emirates
Global Bank etc

The State Bank of Pakistan introduced the lowering of discount rates

and a significant decrease in SLR and CLR to increase branch networks.

3
EFFECT OF RECESSION

On a positive side, The Banking

sector of Pakistan has not been
as adversely
hit by the financial crisis and
recession as the Banks in
America and Europe .

No bankruptcies have been filed as

of late.

Only one bank, Atlas has asked for a

merger with KASB bank which happens
in regular environment also.

There have been no defaulters.

4
HISTORY OF BANKING INDUSTRY : FROM 2007
to 2009

By 2008, 80% of banking assets were controlled by the private sector and
Assets of all banks showed a net expansion of Rs. 4,351 billion by 2007.

Profitability of Pakistan’s banking sector declined sharply in 2008.

Profits of 22 listed banks, which have so far announced their results,

declined by 21 percent to Rs 50 billion in 2008 from Rs 64 billion in
2007.

The 22 banks represent 96 percent of the sector’s market capitalization

and constitute 82 percent of the overall industry’s total assets.

Interest expense to interest income ratio stood 4 percentage points

higher at 48 percent, owing to half year impact of SBP’s regulation
requiring the banks to give minimum 5 percent on saving accounts
deposits.

Non-interest income, other than capital gain, registered a growth of 35

percent supported by income from dealing in foreign currency

5
6
 Supervisory Framework
C A M E L S yste m
•C : C a p ita lA d e q u a cy
•A : A sse t Q u a lity
•M : M a n a g e m e n t S o u n d n e ss
•E : E a rn in g s & Pro fita b ility
•L : Liq u id ity
•S : S e n sitivity to M a rke t R isk

7
d and Supply Factors of Banking In

ia Ahmad, Hibah Shahid, Zahra Millwala, Zainab Ju

 Services
Types of Banks
•Current accounts
• Central bank: State Bank of Pakistan (regulatory role)
•Saving accounts
•
Nationalized
•Consumer loans scheduled banks:
e.g. mortgages, Firstmicro
car loans, Women Bank
financing
• Limited & National Bank of Pakistan
•Consumer credit: credit cards, debit cards
• Specialized banks: Industrial Development Bank,
•Corporate credit
Zarai Taraqiati Bank Limited Punjab Provincial
• Cooperative Bank & SME Bank (developmental work)
•E-banking
•
PrivateBanking
•Islamic scheduled banks: 27 banks (consumer and
corporate services)
•
 Demand Factors
Saving

• Discount Rate
• Income
• Economic Conditions
– Recessionary & Inflationary Pressures
– Exchange Rate Risk
– Conditions of Housing, Mutual Funds and Other
Investment Areas
– Reliance on Government Securities
• Lifestyle changes
• Increasing Population
• Increasing Literacy Rate, Cultural/Religious Values
• Remittances
• Security
–
•
 Demand Factors
Borrowing

• Level of confidence in the system

• Need for Consumer Credit
• Credit policy of the bank (collateral, period of
repayment, frequency of interest charge)
• Growth in industries; local companies and
multinationals
• Transition towards services
• Power crises and resulting multiplier effect
•
 • Supply Factors
•

• Discount Rate (12%), Reserve Ratio (8%) & CAR (10%)

•
• Inflation (11% in 2009-10)
•
• Macro-economic conditions (state of industries)
•
• Political stability
•
• Religious views
•
• Foreign Investment
•
• Government regulations & role of SBP
 • Recent trends in the Supply of Banking
•

• Increased merger & acquisition activity & large expansion of branch

network by private banks

•
• Increased focus towards consumer finance & customer service

•
• Reduction in the growth rate of non-performing loans

•
• Internal composition of borrowings changed from unsecured to
secured borrowings
 Investment
Advances & NPLs
 References

http://www.wikipedia.com

http://www.sbp.org.pk/publications/q_reviews/qpr.h

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=

http://privatisation.gov.pk/Finance/Finance.htm
 Local and international
demand, Pakistan’s standing
in comparison with other
countries

Muhammad Suleman Khan

Sana Ashraf
Samiya Moin
Maria Rehman
Shahmeer Yousuf Khan
 Local Demand
• Deposits Weighted Average Deposit Rate

• Growth rate lower than required

– Law and order situation
– Flight of capital due to the impact of War on Terror

• Increase in absolute amount of deposits due to lack of alternatives

– SBP’s requirement for banks to offer at least five per cent annual return on bank deposits
– Mobile / Online banking and other facilities
– Increasing trend in Foreign Currency Accounts
• Local Demand
Loans Weighted Average Lending Rates

Growth in Musharaf’s Era:

• •Competition
•Relaxed policies
• •Rise of consumer banking
Decline in Growth rate:
• •Effect of the international financial crisis…banks still trying to recover NPLs
•No loans being given on property – declining real estate rates
•Recession…no savings
•Collapse of consumer banking
High unmet demand for Agricultural Loans
Other products
 International Demand

A comparison of the main remittance methods

Mode of transfer Advantages Disadvantages
Via Hundi Speedy, lower transaction costs Less reliable
By hand Speedy, no transaction costs Risky
Via formal institutions Reliable, safe High transaction costs, time-
consuming, formal processes, generally
available only in towns

rcentage of respondents who reported using each method

Method June 2006
Formal Institution 34%
By hand 24%
Via hundi 42%
Source: Remittances in crises, a case study from Pakistan by HPG

Pakistan Government introduced a series of measures designed to encourage the use of

formal channels including:
•Cost reductions----Pakistani banks abroad have begun offering free-of-cost
money transfer services
•Documentations requirements have been eased
•More favorable exchange rate regulations
•Increased number of bank accounts as a result of large cash assistance
program of Pak Gov.
Pakistan’s standing in comparison with
other countries

•Highly affected by recession

•Absence of documentation
•Unavailability of collateral/security

•Illiteracy
•Unavailability of
collateral/security
Pakistan’s standing in comparison with
other countries
•

•
•
•
 References
• Mr. Mirza Kashif Baig - Branch
Manager, Bank Al-Habib
• Ms. Madiha Anwar – Nib Bank
• Mr. Salman Husain –Citi bank
• Mr. Zia Abbas – Head Corporate
Liability, Bank Al Falah Ltd
•
 PRICING AND
COMPETITION IN
PAKISTAN’S BANKING
SECTOR
Mir Abdul Wahab
Naveen Yaseen
Rizwan Mansoor
Saniya Sadaqat
Suneel Harish
Mehek Khalid Rafi

24
MARKET STRUCTURE OF
THE BANKING SECTOR

25
 Market Structure
• The banking sector
has monopolistic
competition. But
the big banks have
been recently
accused of cartel
formation.
•
• MCB, HBL, UBL and
NBP are the top 4
banks in
commercial
banking. Meezan
Bank is the largest
bank in Islamic 26
COMPETITION IN THE
BANKING SECTOR

27
 Competition in the Banking
Sector:
• In terms of attracting customers and
gaining market share, competition is
high.
•
• Privatization and reduction in the
discount rate has fueled even greater
competition.
•
• In terms of deposits, competition is low.
•
• Competition is also intensifying due to
the minimum capital requirement.
28
 Competition in the Banking
Sector:
• Islamic banks pose a great source of
competition to Commercial banks.
•
• Competition has increased in terms of
margins between local and foreign banks.
•
• Mergers and acquisitions play an effective
role in increasing competition.
•
• Banking spreads are also relatively high
today(apprx. 7%), which has resulted in
less competition. 29
Competition in the Banking
Sector:
• The CCP had issued show-case
notices to banks, questioning their
collective behavior in the
advertisement and their
involvement in fixation of spreads
and interest rates on different
products.
•
•
30
PRICING IN THE BANKING
SECTOR

31
 Prices of Banking Services
in terms of Personal Loans:
• Habib • National Bank of
Metropolitan Pakistan:
Bank: • Max repayment
• For a salaried period= 5 years
person, up to 3 • Mark-up Rate=
years 22.32%. 17.5%
• For a • Max Loan amount=
businessperson, Rs. 490,000.
up to 3 years
25.31%.
• Min Loan= Rs.
32
25,000
 Prices of Banking Services
in terms of Personal Loans:
• Muslim • United Bank
Commercial Limited:
Bank: • Speedy loan
• Speedy loan approvals
approvals • Min Loan Amount=
• Max amount= Rs. Rs. 50,000
1,000,000 • Max Loan Amount=
• Tenure is from 1 to Rs. 500,000
5 years • Tenure is from 1 to
• Loan amount can 5 years
be renewed after • Complimentary
6 months credit insurance.33
 ANALYSIS OF PAKISTAN INDUSTRIES
BANKING INDUSTRY
MICR0-ECONOMIC
FACTORS
COURSE INSTRUCTOR: GROUP # : 05
MS. HAMEEDAH SAYANI
BBA IV GROUP MEMBERS:
SPRING 2010 AASMAH MOHTASHIM
AISHA YOUSUF
HUMERA ALTAF
MEHAR HAIDER ALI
TASKEEN LAKHANI
 Labor in bank
• Before reforms, a bureaucratic structure and a govt. Office environment.
• bank reforms improved HR in banks in terms of recruitment (transparent
and merit based)
• privatization -more dynamic and competitive
• Emphasis on equal gender employment opportunities and increased staff
strength of female employees
• in line with this strategy, we have female employment rate of 11.2 percent
of the total employees of the bank from just 4.4 percent in the last five
years. Mohammad Aftab Manzoor, CEO, Allied Bank Limited (BR)
• greater share of women customers who feel they’re neglected by the
patriarchal members of banks
• Emphasis on skilled -trends towards a productive workforce as revenue
per labor increases. Limited labor also means increased dependence on
technology
• Training periods offered by various banks
• employee turnover in the sector has decreased
•
 TECHNOLOGY
•O n lin e a n d in te rn e t B a n kin g
•A T M s ( sh a rin g o f in fra stru ctu re a m o n g st d iffe re n t
b a n ks)
•M o b ile B a n kin g ( e a se a n d co m fo rt. M e rg e rs. S h a re d
in fra stru ctu re w ith o th e r in d u strie s h e lp exp a n sio n )
•C re d it ca rd s, S m a rt C a rd s a n d D e b it C a rd s ( se cu rity
issu e s)

•Benefits to customers
•Reduction in transaction Cost to banks

IT Developments in Commercial Banks (examples):

NBP- ‘core banking application’ to enhance efficiency,
customer service and facilitate launching of new
services.
MCB- mobile service (shared platform approach) so that
all banks and mobile operators deliver service with
 • TECHNOLOGY – SBP
•

• Introduction of Real Time Gross Settlement System to

facilitate transfer of high value funds
• Upgradation of Globus, ERP and Data Warehouses
• Maintenance of SBP’s both internal and external
website
• Data service monitoring system set up based on SMS
alerts
• Applications developed to assess performance of IT
help desks
• Video Conferencing set up is being used.
• Disaster Recovery Site has been established.
• Proof of Concept for Laptop Encryption completed
• automated vulnerability management system
• intrusion detection and prevention systems
• Capital And Resources
• MCR of Rs10 bn by end of 2013
• MCR for the year ended December CY09 was Rs
6.0 bn
• MCR for the year ended December CY08 was Rs
5.0 bn
• 23 banks including 6 foreign banks are fully
compliant with the minimum paid-up capital
requirement (MCR). Rest of the banks are in
the process of meeting the MCR either
through fresh capital injection or through
mergers and acquisitions (CY 08)
• CAR at end-CY08 12.3% (MIN. REQD: 09%)
• 3 CBs fell short of minimum requirement- 2 have
their CAR at 7%
• 24 of 40 banks had their CAR over 12% at end-
CY08- well capitalized banks
• Structure of funding: (09)
i. Equity: 662 bn
ii. Borrowing/debt: 659 bn
• equity of the banks increased:3.4%, during CY08
to Rs 563bn (a satisfactory rise of 40.2bn even
though < CY07)
 Other Resources
• Strong growth of the asset-base (CY09)
• Loan portfolio grew by 18.4 percent to Rs 3.2
trillion by end CY08 (diversification of
credit)
• banks continued to invest heavily in
government papers and bonds of Public
Sector Enterprises (PSEs). (CY08-CY09) b/c
i. building up of circular debt (from CY08)
ii. inflationary pressures pushed the real lending
rates into the negative territory (pvt.
Sector)
• deposits base showed the signs of recovery
(CY09)
• Banks’ deposit base, inextricably linked to
bank’s liquidity position, grew by 9.4%
during CY08 [annual average growth of
18.1% during CY03-07]
• sharp decline in the liquid assets to total asset
ratio to 28.6%(CY08) as against 33.6 %
(CY07)
• Liquidity Problems b/c of:
1 deposit withdrawals
2 low confidence in the overall economic
position of the country
3 the spillover impact of the international
 Others: NPLS
• NPL as a sign of asset quality
• Witnessed rise of 64.8% during
CY08 to Rs 359.3 billion
• adverse impact on the financial
performance-required banks to
create provisions amounting to
Rs 105.9 billion during CY08
•
• Caused by
1 driven primarily by cyclical factors
2 rapid credit expansion in recent
years (CY03 to CY07).
3 Structural weaknesses
4
• Within the corporate sector, NPLs of
the textile sector at 18.8
percent stand out particularly.
•
 references
• Business recorder
• State Bank Of Pakistan Publications
(graphs and stats):
1 Financial stability review 2008-2009
2 Quarterly performance of the banking
system
3 First Quarterly Report 2009-2010
4
5
MACROECONOMIC FACTORS
AFFECTING BANKING
INDUSTRY OF PAKISTAN

Presented by : Afrah Zubair

Maryam Sultana
Muneeb Siddiqui
Rimliyah Tariq
Saman Khan
Shoaib Abbas
 INFLATION
• Is inflation bad for the economy? Not
always
• Beneath some threshold, higher
inflation might actually lead to
increased real economic activity
• 3 to 6 percent of inflation has positive
effects for Economy of Pakistan.
(Khan, 2005 and Hussain, 2005)
– Encourages investment
– Encourages Production
– Allows growth in wages
 INFLATION
•However, when inflation crosses reasonable limits, (3-
6%) it produces negative effects.
• It reduces the value of money, which is the medium
of exchange
• This results in uncertainty of the value of gains and
losses of borrowers and lenders as well as buyers
and sellers- discourages savings and investment
• Also investors demand a higher interest rate to
consider lending their money for more than the
shortest term to preserve the "purchasing power"
of their money.
• Savings are discouraged as inflation reduces the real
rate of return on financial assets.
• Increases the divide between the rich and the poor
•
• For Pakistan’s Banking Industry, inflation can have negative
 INTEREST RATES
•Spread between assets and liabilities causes earnings for
Banks. (Interest rates they provide and take).
•
•Modest and gradual change in interest rate has only minor
impacts on most bank interest margins.
•
•Economic growth and expectations of borrowers plays an
effective role in determining interest rate policy.

•Higher inflation is associated with a growing economy.

Federal Reserve increases interest rates to slow the
economy down and reduce inflation

•
 TECHNOLOGY
• Online banking / E-banking
– Payments, Transactions, Inquiries etc
through ATM, credit cards and internet
banking
– All cards with Visa and Orix logo can be
used anywhere on internet for
purchase – there are a lot of banks is
Pakistan issuing credit cards, even
debit cards with Visa logo
– UBL wiz card is first Pakistani Debit Card
that can be used on internet for
purchase.
•

• Mobile Banking
– Sms banking
 TECHNOLOGY
• Recent advencements ?
– Tameer microfinance bank
– Easy paisa (Telenor)
– The State Bank of Pakistan is
considering introducing a new
non-bank led and Telco led
model of branchless banking
• To promote, the lowest cost of all
mobile money transaction around
$0.08 per transaction
•
 Environment
§ Mixed macroeconomic conditions
I. The exchange rate continues to depreciate
despite economic recovery and a reduction in
the current account deficit.
II. The lending rate has reduced in recent quarters
on account of decrease in discount rate.
III.The CPI rate (measured on year-to-year basis)
also declined significantly in recent quarters
on account of low food inflation.
§ Improved credit ratings and decrease in the growth of
Non performing loans (NPLs) due to slightly
improved economic conditions.
§ Exposure of banks towards risk from bank
operations and failures in controlling the
environment and the systems of banks (due to
increased competition and regulations) resulted
in the banking system reporting 758 fresh cases
of fraud and forgeries, which are higher than
 POLICIES & REGULATIONS
INCENTIVES

TAXATION

Group 7
vHaseeb Shahid
vJawad Farooq
vMaha Khan
vSyeda Maryam Anis
vSyed Muhammad Hamza Arif
 POLICIES
• Policy on Non-Performing Loans
•
• Refund of unclaimed deposits
•
• Policy on bank charges
•
• Policy on issuance of Rupee Traveler Cheque
•
• Policy on termination of persons involved in
fraud, forgeries and disciplinary actions
• 1
 REGULATIONS
• Deposit Insurance Company (DIC)
• Function: increase liquidity, stability
& competitiveness
• DIC’s being strengthened to avoid
bank insolvency
• SBP & SECP to have a timely check
• SBP providing relief by direct
minimum payout at 5% per annum
• Scope of DIC 2
 INCENTIVES
•
• Substantial investment needed in
agriculture sector
•
• Agriculture sector is very risky – banks
are reluctant to give loans
•
• The SBP needs to come up with
incentives to secure repayment of
agriculture loans
•
• SBP has initiated The Microfinance
Credit Guarantee Facility – 40% of
funds insured
3
•
 TAXATION
According to the budget 2009-2010:
•

• Taxpayers are entitled to

compensation @ 6% (late payment
of refunds)
• Rate of compensation is being
increased to 10% per annum
• Facility to claim deduction on
account of provisions of non-
performing loans restored.
4
• Additional tax is chargeable @ 15%
 TAXATION
• Levy of FED on fund services provided by
banks
• The rate of default surcharge higher than
the interest rates of banks to avoid
short filing by the taxpayers,
KIBOR+3%
•
The Federal Value Added Tax Act 2010
•

• Restrictions on input tax deductions

• Recovery or payment of tax- Where
any amount of tax is due from any
person, the officer of Inland Revenue
authorized by the Board or
Commissioner in this
5
behalf, may take
any of the 2 actions
Banking Industry
SWOT AND PEST
Presented by : Junaid Hemani
Jane-Ali Abdul Nabi
Mustafa Azhar
Mahzaib Aziz Memon
Rizwan Rafiq

Instructor : Ms. Hameeda Sayani

55
 SWOT
Internal
STRENGTHS WEAKNESS
High profitability Corruption in recruitment system

Huge market size Lengthy processes of credit

approval
Capital Intensive NPL ( Non-performing Loans)

Easy accessibility for customers Lack of awareness creation

projects for the use of credit cards
Capital Intensive Low borrowing ratio

Educated Manpower Lack of RnD

56
 SWOT
External
Opportunities Threats

Islamic Banking Economic Slowdown

E-banking Political Instability/security

Mobile Banking Weak Database(NADRA)

Micro-finance Interest rate and Exchange risk

Mortgages High competition

Technological Advancements Money laundering

57
 PEST
Political Social

Politicized recruitment Saving Ratio is less

No mergers and acquisitions Distribution of Income

done by Government ( JP
Morgan)
Political Instability High population (youth)

Loans approved because of Religious point of view over

political pressure interest rates

58
 PEST
Economic Technological

Growth rate expected to inc. Research and Development

High discount rate Automation Systems

Exchange rate Banking softwares are obsolete

High inflation but has reduced in Centralization

the last quarter

59
1

DIAMOND
MODEL
60
 D E M A N D FA C T O R S
- Attractive return on Investment(13.5%
p.a)
-Secure to invest
-Islamic Banking
-Diverse banking products (car financing
loans, Student Loans, Mortgage Loans &
Retirement Plans)
-Attractive features for A/C
holders(internet banking , phone
banking, sms alerts,etc)
-Mechanization/Modernization
in agricultural sector(Zarai
2
RELATED OR SUPPORTING
INDUSTRIES
•Telecom industry: Mobile
banking
eg. MCB
•Auto industry: Car finance
eg. Suzuki auto
finance
•Housing Finance:
•Insurance industry:
Eg. Takaful
insurance
Corporate Sector: Form of
Loans
3
•STRATEGY:
– Aim to become leading financial services
provider, partnering with their customers for a
more prosperous and secure future.
– Banks also aim for increasing investors
confidence by providing a wide array of
services and products
– Increased profits and market share
• STRUCTURE:
– Organized structure
– Public sector – 4 - Islamic – 5 - Private – 20 -
Foreign - 7
– Development financial institutions - 8
– Specialized banks – 4 - Microfinance - 6
•COMPETITION:
•Monopolistic competition
•Foreign banks were, and still, competing mainly with the five
big banks.
•Foreign banks are making huge investment in tec-hnology, i.e. on-
line banking, ATMs, credit cards, etc
•
 GOVERNMENT

1 .REGULATIONS
•On site and Off site inspections are being made by the
central bank of Pakistan.
•A new department NBFI was setup for supervision and
inspection.
•2. DEVELOPMENTAL Role
•Rehabilitation of financial institutions, directing the
use of credit and providing subsidized credit.
•3.COMPETITION
•The Competition Commission has strict vigilance on the
competition among various banks so that the consumers
do not get exploited.
•
•
Porter’s Five Forces
The Banking Industry

Group Members:
Fahad Feroz
Khadijah Arshad
Muhammad Ali Hemani
Muhammad Haroon Siddiqi
Reena Kirmani
Wajiha Khan

65
 Barriers to Entry - High
• High Economies of Scale
• High Capital Requirement
• Some Product Differentiation
– Brand Name
– Small Incentives
– Innovative Products
• High Tax Rates
• High Exit Barriers
• Complex Laws & Regulations

66
 Threat of Substitutes –Low
• Non-Banking Financial Institutions
• Company Financing/ Leasing
• Money Transfer Services
•

67
 Bargaining Power of
Customers
Large Customers (Companies &
•

HNWI): High Bargaining Power

• Better-informed, professionally
managed funds
• High Switching Costs
• Multiple Investment Options
• Multiple avenues for raising capital
–
68
 Bargaining Power of
Customers
Small Customers (Retail Customers):
•

Low Bargaining Power

• Low Awareness about available
options and ability to compare
them.
• Limited Accessibility
• High Switching Costs
• Price Fixing and Deceptive Marketing
Practices
• No depository insurance. 69
Bargaining Power of Suppliers -
Low
• Depositors
• Inter-Bank Lending
• Technology and Other Material
•

70
 Rivalry Among Existing
Firms - High
• Numerous Competitors
• Slow Industry Growth
• Lack of Product Differentiation
• High Switching Costs
• Diverse Competitors
• High Strategic Stakes
• Herfindahl Index

71