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Role of Pakistan’s banks commendable in promoting public savings, trade assistance but need more increasing impact

Under current plan, Sindh Bank foresees consumer financing to increase significantly by 2020
Interview with Mr Tariq Ahsan — President & CEO, Sindh Bank Limited

Profile

Mr. Tariq Ahsan has joined Sindh Bank Limited as Executive Vice President and Head of Treasury at its inception in December 2010 and was later appointed as its acting President & Chief Executive Officer (CEO) on April 15, 2016 and confirmed as its President and Chief Executive Officer (CEO) on July 29, 2016. During his tenure in the financial services industry, he has had versatile work experience of over 27 years in various roles in the established institutions of Pakistan such as Pak Brunei Investment Co, PICIC Commercial Bank Ltd, Dawood Bank Ltd, IDBP, NDFC, NDLC, Bank of Oman and now Sindh Bank.

PAGE: WHAT IMPACT COULD BE SEEN ON BANKING PROFITABILITY IN THE CURRENT YEAR DUE TO THE PREVAILING INTEREST RATES?
TARIQ AHSAN: Steep decline in interest rates pre-2017 has shrunk the sector’s interest/markup spread between Advances and Deposits to approximately 5.5% from 8.8% in 2011.Shrinking margins have been caused not just by decline in lending rates but by relatively lower decrease in the return on deposits for bank’s own interest in customer retention and introduction of minimum rate on savings account by the regulator. Average headline CPI inflation for 9 months of FY17 was 4.0 percent compared to 2.60 percent during the same period previous year which was within SBP’s forecast range for the period. Inflationary pressures are expected to increase in the coming period due to rise in oil and global commodity prices and heavy domestic borrowing by the Government. Combined with a burgeoning trade deficit, interest rates may witness a rising trend in line with higher expected inflation easing somewhat the pressure on banking sector spreads.

PAGE: COULD YOU TELL US ABOUT THE CONSUMER FINANCING BY BANKING SECTOR IN GENERAL AND YOUR BANK IN PARTICULAR?
TARIQ AHSAN: From the peak of PKR 370 billion in 2008, consumer financing witnessed a severe downward trend due to mounting NPLs and rising interest rates, touching a low of PKR 250 billion in June 2012. However, thereafter due to the gradual decline in interest rates leading to the all-time low SBP policy rate of 5.75% in 2016, there has been a revival as consumer financing touched a high of PKR 371.8 billion on December 31, 2016 led by a surge in auto financing. After the debacle of earlier years, banks have become more prudent and risk conscious in their lending programs. Considering that consumer financing stands at just 6.2% of the total financial sector advances, banks are well protected against any downturn. Sindh Bank has as a policy to keep its exposure in consumer financing at a low level. However, under its 2016-2020 business plan, this exposure is projected to increase significantly by 2020. Already on the drawing board includes one product each for Auto Loans and Advance against Salary and more are expected to be added over time.

PAGE: WHAT BENEFITS HAS AN ORDINARY PAKISTANI GOT FROM THE BANKING SECTOR OF PAKISTAN?
TARIQ AHSAN: The Pakistani society to a large extent prefers transactions in cash with the result that a huge part of the economy (estimated to be 70%) is undocumented. Pakistan’s banking penetration stands at just 16% which is one of the lowest in Asia, as India stands above 50% and Bangladesh stands at around 30%. According to the 2015 Pakistan Access to Finance survey figures posted on SBP’s website, only 23% of the adult population was being served by formal banking channels, which increased from just 8% in 2008. Government of Pakistan’s National Financial Inclusion Strategy (NFIS) devised in 2015 aims to enhance formal financial access to 50% of the adult population by 2020.
In order to increase the trust of ordinary Pakistanis on its banking sector and protect their rights, SBP has issued Guidelines of Business Conduct for Banks emphasizing fair treatment to customers. Further on the basis of globally accepted consumer protection principles conveyed by SBP, the banks have devised their own Financial Consumer Protection Framework, approved by their Board of Directors. Amongst the other pillars, the framework requires the banks to develop programs and appropriate mechanisms to help existing and future consumers develop the knowledge, skills and confidence to appropriately understand risks, including financial risks and opportunities, make informed choices, know where to go for assistance when they need it. For the ordinary Pakistani, undertaking transactions through formal banking channels has its obvious advantages in terms of security i.e. safety of funds, availability of financing and other financial services, secure and speedy transfer of funds at a nominal cost etc.

PAGE: ARE THE CPEC PROJECTS AN EXCELLENT OPPORTUNITY FOR THE BANKING SECTOR OF PAKISTAN?
TARIQ AHSAN: CPEC related investments so far have been in the power, construction (infrastructure) and the transportation sectors. This is mainly benefitting the cement, steel and services sectors directly, while revival of the industrial sector in general can be expected due to improved energy supplies as power projects under CPEC come on stream.
Opportunities created by CPEC could go a long way in raising the economic potential of our country. Though initial mood has been upbeat about CPEC related funding opportunities for banking sector, we need not forget that these projects are almost entirely funded by China through various concessional loans and grants. However, though the Pakistani banks may not have significant direct exposure to CPEC projects, they can be potentially benefit from the BMR to existing projects and ancillary projects that come up as well as increased economic activity as a result of CPEC.

 

PAGE: WHAT ROLES HAVE BANKS PLAYED IN TERMS OF BUSINESS ACTIVITIES IN PAKISTAN?
TARIQ AHSAN: A growing and dynamic banking sector is essential for economic growth in Pakistan, as growth in the banking sector and the real economy mutually reinforce each other. Banks in Pakistan are the major players in promoting public savings and channeling these to become providers of funds to businesses as well as facilitating domestic and international trade.

Data for FY 2016 is given below:

– Foreign trade-facilitating exports of US$ 21.97 billion and imports of US$ 40.45 billion.
– Financing to businesses-Corporates PKR 4,056.7 billion and SMEs PKR 404.6 billion.
– Sector wise, the major takers are Production/Transmission of energy PKR 892 billion, Textiles PKR 852.5 billion, Agri-business PKR 541.8 billion, Chemicals & Pharmaceuticals PKR 250.1 billion and Sugar 176.2 billion.

Some of the generic products that the banks are offering for promoting trade and industry in Pakistan are:

– Loan products specifically designed to finance Small and Medium sized enterprises.
– Financing to corporates for short term working capital and medium to long term loans for new and BMR projects.
– Facilitating international trade i.e. imports and exports through Letters of Credit, Discounting of Bills, Collection of Bills, Guarantees and Confirmations, Remittances etc.
– Cash management services.
– Other Banking services.

By helping businesses grow, the banks are at the same time supporting the government’s efforts to increase the size of the formal economy while discouraging the informal.

PAGE: WHAT IS YOUR TAKE ON THE OPERATIONAL COST INCURRED BY BANKS?
TARIQ AHSAN: Operational cost to income ratio during year ended 2016 was 53.1%, which compares to a high of 57.2% in 2013 and a low of 47.8% in 2015 during the last 5 years. The increase in 2016 occurred mainly due to a slight decline (instead of increase) in the Net Interest Income of Banks from PKR 496.185 billion in 2015 to PKR 484.793 billion in 2016. In my view, other than a little flab, banks’ operational costs are reasonably well controlled though increased compliance and operational requirements imposed upon banks does have an increasing impact on the operating costs of banks.

SINDH BANK LIMITED:

Sindh Bank was established by the Government of Sindh in October 2010 as wholly-owned by the Government of Sindh. It was granted license to conduct commercial banking business in December 2010 and commenced full scale banking business in April 2011. As a new bank, it had to start from scratch with a paid up capital of Rs10 billion. From an emerging bank’s perspective having been in business for only 6 years, the following achievements are virtually unmatched or comparable with the best in the banking history of Pakistan at the same age: – Established 260 online branches in 130 towns/cities in all the four provinces, Azad Jammu and Kashmir (AJK) and Gilgit-Baltistan (GB) with plans for 40 more branches in 2017. – Established the Islamic Banking Division in June 2014 and setup 14 Islamic Banking (IB) branches and 11 IB windows in conventional branches in the short span of just two and a half years. – Installed 225 ATMs with 80 more to be added in 2017. – Achieved a high Credit Ratings of A-1+ in short term which is the highest in class and improved its medium to long term rating from AA minus to AA after just four years of commencing full scale business. – Remains comfortably compliant with SBP’s MCR requirement with Capital and Reserves of Rs15.4 billion and CAR of 18.33% against the year-end 2016 requirement of 10.65%. – Recording impressive growth in the following key areas during the 2011-2016 period. – General provisioning of Rs4.0 billion. – Establishing a wholly-owned microfinance subsidiary by the name of Sindh Microfinance Bank Limited (SMFB), presently having the license to operate in the province of Sindh. SMFB started microfinance operations in May 2016 and has five (5) branches and nineteen (19) service centers, mostly in rural areas of Sindh. By the end of 2017, SMFB plans to have a network of ten (10) branches and forty (40) service centers. – Home Remittances: In this regard Sindh Bank has arrangements in place with globally reputed companies such as Western Union and MoneyGram and some other smaller companies. – State-of-the-art SMS Banking facility (mobile banking), an excellent and cost effective alternate to branchless banking. – Launching of PayPak, UnionPay and VISA Debit cards. The VISA card uses EMV (Euro Master Visa) chip technology making it more secure and less prone to frauds, including skimming. – Launching a mobile app whereby non-resident Pakistanis can remit money to their families in Pakistan instantly on a 24/7 basis without the need to visit any currency exchange or agent. The product is being launched under the Pakistan Remittances Initiative (PRI). – One of the first few banks which successfully added RTGS/STP (Real Time Gross Settlement/Straight Through Processing) functionality to its Core Banking system, enabling customers to directly transfer their funds, including home remittances, on a real time basis. – Instrumental in supporting government’s CSR activities especially related to BISP and Zakat disbursements. Sindh Bank’s medium to long term vision is to be a significant player amongst mid-sized Pakistani banks as well as work towards deepening the financial sector in line with State Bank of Pakistan (SBP) vision to which end we expect the Bank’s wholly-owned microfinance subsidiary by the name of Sindh Microfinance Bank Limited (SMFB) will also play a part.

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