INVESTMENT PROSPECTS

FOREIGN BANKS VIE FOR MARKET SHARE

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Aug 24 - 30, 2009

While czars of global economy have started to give soothing statements about recovery of the world economy with interposed addenda that it would take years for the world economy to catch erstwhile speed, they are reticent on how much time should developing economies that highly depend on foreign investments for growth wait for growing inflows across the border.

Investors continue to invest in lucrative sectors in foreign countries despite wealth-corrosive long spell of recessions for last two years in major world economies. However, out of tumultuous recession came out discernible economies which were least affected and thus would go with expansionary global investment plan as well as sectors which remain attractive to investors.

Following deregulation policy of military-led former government, banking sector of Pakistan turned out to be a highlighted avenue for foreign investment. Like other sectors, this sector had also continued to witness momentum growth in foreign investments for five or six years. Foreign banks extended branch network, acquired banks, and transferred international banking expertise and technology in the country, piquing interests of private sector in financial business as well. The trend did continue well until the financial year 2007-08, but it lost its energy later on as seen in the total FDI in banking sector in fiscal 2008-09.

Financial business of Pakistan received $707.4 million foreign private investment in FY09, down by 114 percent over $1864.9 million in FY08. Global financial downturn had hit hard the liquidity position of Western Europe, a major foreign investment group in Pakistan, by last fiscal year as FDI except portfolio investment from Western Europe dropped by 61 percent to $741.1 million against $1107.7 million in preceding year. Flight of capital from stock market prevailed along the both financial years. Everybody knows the reason. Rapidly deteriorating assets of leading private banks in USA and Britain compelled them to reduce their exposures and confined their businesses in key international markets. The situation got worst to such an extent that both the governments had to kick start comprehensive nationalization programmes to bail out sagging financial institutions. Things are still not in the right direction and partly nationalized financial institutions have either stashed away market expansion strategies or put on auctions foreign assets to buy back bailed shares.

Amid such a scenario, what are the chances of inflows coming from USA, EU, or Japan? "Zero chance is there that foreign investors will enter in banking sector of Pakistan because of already-established network of indigenous banks," comments a senior banker requesting his anonymity. He says there is no good prospect of foreign investment coming in Pakistani banking sector in near future. 'Understand a distinction, they might be participating in merger and acquisition and consolidation unabatedly, but as far as branch mode operation is concerned there would be unlikelihood of their participations,' he clarifies referring to entry of new foreign banks. Foreign banks have indomitable edge only over technology and customers in Pakistan are not technology-savvy, he observes. He is of the view the attraction is scant whilst impediments such as domestic tough competition are significant. Four big banks have already established network, giving new entrants tough time to vie for market share. Consolidation will remain a buzzword in the banking sector, he believes. More than two small banks need to assume merger in order to meet paid-up capital requirement. 'I think the criterion of paid up capital requirement needs to be softened,' he remarks. Paid-up capital requirement of Rs23 billion is over ambitious, he says adding even post-merger would not achieve the target. SBP may revise downward paid-up capital requirement, he says adding it might come down to Rs14 to 15 billion.

State bank of Pakistan has raised the minimum paid up capital requirement for all locally incorporated banks to Rs23 billion (net of losses) to be achieved in a phased manner i.e. Rs6 billion by Dec 2009, Rs10 billion Dec 2010, Rs15 billion Dec 2011, Rs19 billion Dec 2012, and Rs23 billion Dec 2013.

Apart from financial downturn and recessionary pressures, that made developed economies to cut down their assets in foreign nations, political instability inter alia other underlying factors shoo away foreign investors. A correlated investment hurdle is inconsistent policies. Businesspersons raise a common complaint about uncertain rules and regulations in the country. The continuity of policies is not guaranteed especially after change of government. The worst is that sometimes rules and polices are subject to be revised within the very government that chalk them out. It poses a cost-incurring risk to stability and survival of business.

Critics say that there is cronyism in government circles that tilt towards local investors in banking sector. Not giving level playing field to foreign investors in merger and acquisition this favouritism has created unhealthy competition, they observe. Although there is a need to examine the veracity of the opinion under litmus test, one thing is for sure that tacit desire of dominant local banks exists. In spite of all, growing customer base, profitability, and weak labour laws are redeeming stimulants that elevate return on investment ratio in Pakistan's banking sector. What else could you name capricious practice of banks that make employees work more than standard working hours? Working for eight hours a day is uncommon for bank employees. Some banks especially foreign banks give two days off a week and therefore extending working day timing by one or two hour. Return on assets and return on equity are on increase for local and foreign banks. Healthy earning is mainly an outcome of high spread, which hovers around 7 to 8 percent. This is another charm for investors. Investments from Arab and Asian economies will prevail in the FDI banking sector. In last fiscal year FDI in banking from the region decreased.