Apr 20 - 26, 2009

Pakistan's banking system has effectively coped with several challenges emanated from economic slowdown worldwide, mainly because of strong resilience built over the years and effective regulatory and supervisory regime.

The banking sector in Pakistan remains immune to the global financial turmoil but it faces domestic headwinds due to its exposure to domestic cyclical sectors in a slowing growth (manufacturing and consumer), high interest rate, and tough operating environment on the back of energy crisis. Financial experts told PAGE asset growth and quality of the financial sector are expected to remain under pressure in 2009.

According to them, profitability of Pakistan's banking sector declined sharply during the last year owing to multiple reasons, reflecting the deteriorating economic conditions of the country. Profits of 22 listed banks, which have so far announced their results, declined by 21 percent to Rs50 billion in 2008 from Rs64 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.

Banking system shows strong resilience to unusual shocks in major risk factors. This strength of the banking system largely came from the prudent regulatory and supervisory regime, strengthening of risk management, and governance standards in banks as well as the improved solvency position.


The analysts believe that profits will decline in 2009 as well, but the drop will be smaller than the one recorded in 2008. Next year advances growth of banks is likely to remain low. "Moreover, we also expect spread to come down in months to come," they said.

Stock market crash in the second half of 2008 resulted in bank recognising impairment loss of Rs12 billion as against only Rs287 million in 2007, they said.

According to the State Bank of Pakistan's Quarterly Performance Review of the Banking System for the quarter ended December 31, 2008 released recently, growth rates, credit risks, and earnings of the banking system are likely to remain under strain in future due to constrained economic environment both at home and global fronts. Low demand for banks' advances will shift asset mix away from advances to government papers, and deposits are likely to grow at a steady pace. This respite in liquidity may have positive bearing on interest rates, the report said.

The latest post quarters statistics of March 2009 also vindicate these trends. Since the last week of December 2008, the asset base over these weeks has grown by 2.3 percent with 1.8 percent and 11.3 percent increase in deposits and investments respectively, while advances declined by 2.3 percent.

The present tough economic environment will also heighten the credit risk and affect the earnings due to increased loan loss charges and constrained incomes. The system is expected to remain profitable in the coming quarters, though this phenomenon may not be widely shared across the market players. Though the concerns about the solvency of top banks of the world are weighing on the investor confidence across the globe, the banks in Pakistan are still maintaining their resilience, the report said.

According to the report, the strength of the banking system largely comes from the prudent regulatory and supervisory regime, strengthened risk management, and governance standards in banks as well as the improved solvency and earning capacity of banks. The asset base of the banking system grew 2.6 percent over the quarter to reach Rs 5,653 billion, well supplemented by 3.6 percent and 7 percent growth in deposit and shareholders equity, respectively.

The liquidity profile of the banking system remained constrained for most part of the quarter. However, post quarter statistics indicate significant easing out in liquidity profile because of the gradual increase in deposits and reduction in banks' advances.

The report pointed out that in line with deterioration in macroeconomic indicators, the credit risk remained heightened during the quarter. Non-performing Loans (NPLs) of the banking system increased to Rs313 billion (Rs278 billion in September-2008) giving infection ratio of 9.1 percent and net infection ratio of 2.5 percent, the report said. However, satisfactory earnings enabled the system to cover these loan losses. NPLs are covered by the loan loss provisions to the extent of 75 percent, but due to these increased loan provisions in absolute amounts, earnings of the banking system came under pressure and remained lower than last couple of year's levels.

Pakistan's microfinance industry has emerged as one of the fastest growing sectors. The government's Microfinance Sector Development Programme (MSDP), establishment of Pakistan Poverty Alleviation Fund (PPAF), promulgation of the Microfinance Institutions Ordinance 2001, SBP's Financial Inclusion Programme and the recent Microfinance Credit Guarantee Facility-all have helped precipitating the sector's growth.

With a growth rate of 45 percent over the past three years, Pakistan's microfinance industry has emerged as one of the fastest growing sectors globally today reaching around 2.1 million clients in December 2008.

According to experts of micro finance industry, product diversification has taken root and savings and insurance uptake has surged. Institutions are moving towards financial sustainability and accessing commercial sources of funding. Thus, despite the late start, and consequent relative youth of the sector, microfinance providers in Pakistan have remained significantly proactive in terms of fostering innovation and channelising development of microfinance as a whole.

Micro-finance sector is making a dent on poverty and it should continue playing its due role in the economy with diversification, they argued. However, they said political interventions at local levels need to be stopped to ensure growth of micro finance sector.

They also said that impact of Rs10,000 to Rs15,000 per household micro credit by microfinance institutions was not economically feasible for farmers due to high cost of inputs in agriculture sector. They said that credit agencies must provide technical assistance and cooperate with farmers for setting up markets. "Microfinance is the single tool for poverty reduction," they said, adding that a tradition must be set to re-examine and revisit the current microfinance policy to establish markets for agriculture sector.

Grameen Foundation, Women's World Banking concerned over crisis hitting micro finance sector Grameen Foundation (an international non-profit US-based organisation working for poverty alleviation) and Women's World Banking (a global network of 54 top performing microfinance institutions and banks) have expressed concern over the crisis that is affecting the microfinance sector in Punjab due to the intervention of some elected representatives.

Grameen Foundation President Alex Counts and Women's World Banking President and CEO Mary Ellen Iskenderian wrote a letter to Punjab Chief Minister Mian Shahbaz Sharif urging him to issue a public statement on the importance of microfinance and send a letter to all members of the provincial assembly in Punjab and the members of the National assembly asking them to support microfinance institutions and also help curtail inappropriate interventions by local politicians.

"We are concerned that today the microfinance sector in Pakistan is under threat. The intervention of some local elected representatives has given rise to a crisis - a situation which has damaged the reputation of the microfinance sector in Pakistan and could lead to a major crisis with national as well as international implications," they wrote.

They also urged Punjab Chief Minister to take swift action in support of the microfinance sector in Pakistan. They also asked him to ensure the security of Kashf staff, as they interact with clients and also reschedule Kashf's existing loan to Pakistan Poverty Alleviation Fund (PPAF).

"Even in the difficult scenario, Kashf Foundation has been making repayments on its loan to PPAF in order to maintain its credit standing and fulfill its obligations. PPAF's support is critical at this juncture. Kashf has received commercial funding from banks in Pakistan as well. If they are unable to meet their debt obligations, the commercial banking sector will see a significant negative impact and may stop supporting microfinance," they wrote.

"The current crisis to microfinance sector affects not only Kashf Foundation and the 300,000 clients it serves but, if left unchallenged, will have repercussions for all the poor in Pakistan. It will also dampen efforts to expand critically needed financial services to the poor in other parts of the world as well, particularly if loan guarantees from international institutions are called in the case of a default," they further wrote.

It may be mentioned that Grameen Foundation and Women's World Banking have been supporting microfinance in Pakistan for nearly the past decade.

It may also be pointed out that Grameen Foundation has worked closely with Kashf Foundation and National Rural Support Programs urban microfinance project to support expansion of financial services to the poor in Pakistan, and has arranged US $20 million financing for Kashf Foundation in local currency by providing US $5 million guarantee to the banks. This is the largest guarantee issued by Grameen Foundation to any microfinance institution in the world and is a testament of our commitment to the growth of microfinance in Pakistan.

On the other hand, Women's World Banking has assisted Kashf's institutional development through product diversification, strategy and organizational development, helping Kashf to maintain its position as a leader and innovator in the microfinance industry in Pakistan. In addition, Women's World Banking has been a source of continued financial support through its capital markets programs and financing vehicles, and most recently continued this commitment by purchasing a 10% stake in Kashf Micro Finance Bank (KMB), valued at US$ l million, through the WWB Microfinance Equity Fund (WMEF).

Third bank shows interest in buying the operations of RBS Financial services company Jahangir Siddiqui and Co Ltd. (JSCL) has shown its interest in buying the operations of Royal Bank of Scotland (RBS) in Pakistan.

JSCL is the third Pakistani Company to express an interest in buying RBS's Pakistani operations after Habib Bank Ltd., and MCB Bank. RBS Pakistan has a market capital of around $266 million. 'JSCL has been invited to conduct due diligence of RBS Pakistan,' JSCL said in a statement to the country's bourse, a broker at LSE told PAGE. 'JSCL will apply to the State Bank of Pakistan through the financial advisers of RBS, to obtain the requisite permission to commence due diligence of RBS Pakistan.'

Earlier, Habib Bank, which is owned by the Aga Khan Fund for Economic Development, and MCB, which is 20 per cent-owned by Malaysia's Maybank, said separately they had expressed an interest to buy RBS's operations in RBS Pakistan. The two Pakistan lenders may be interested in RBS's assets to gain clients from multinational companies, its consumer banking network, and a few prized branches in main cities, analysts believe.




The Association of Certified Chartered Accountants (ACCA) in its budget proposal 2009-10, submitted to the Federal Board of Revenue, has proposed that the corporate tax rate for the manufacture sector should be reduced to 30 percent and Workers Welfare Fund from 35 percent to support the manufacturing enterprises affected by increasing costs of doing business.

The budget proposal was finalised as a result of a consultative process initiated by ACCA Pakistan Budget and Taxation sub-committee and it involved all ACCA members. Under the theme "Supporting Fair Taxation," ACCA Pakistan recommendations aim at facilitating equitable economic growth of Pakistan through enterprise success, environment conservation, social equality and promoting savings and investments.

The marginal tax relief that was made available to salaried individuals should be extended to the Association of Persons (AOPs) and the non-salaried individuals. Furthermore it is proposed that the tax on commercial imports be increased from the present two percent to five percent. Tax relief on capital equipment purchased to ensure continuity of power supply should be provided to SMEs so as to enable them to effectively manage the current energy crisis.

The budget proposal recommends that as sustainable business practices need to be encouraged, green taxes should be introduced. A green tax levied at a rate of 10 per plastic bag can contribute to the Revenue Collection and can discourage the use of plastic bags, thereby mitigating a major environmental hazard. Sales tax and import duties on import of machinery for the water and energy conservation should be abolished.

With a view to promote the culture of savings and investment, it is proposed that tax credits should be given on the cost of shares acquired under the employment share schemes and fixed deposits held with scheduled bank for more than 365 days.

The ACCA Pakistan also recommends that FBR broadens the tax base and increases perceived fairness of taxation system by taxing agricultural income. As agricultural income is highly dependent on cyclical weather conditions, tax can be calculated by averaging agricultural income for two years.

The ACCA budget proposals also emphasised the need to indemnify the individuals by proposing personal benefits e.g. National Insurance and tax benefits for widows and orphans. Inheritance tax may be imposed on the value of the gift or inheritance that exceeds Rs. 5 million. The proposal also suggested withdrawal of Capital Value Tax.

Keeping with international best practice, Alternate Dispute Resolution Committee (ADRC) may be empowered to pass an appropriate order after hearing beyond acting on advisory capacity. The proposal advises facilitation of taxpayers through enhancement of e-portal efficiency.