Apr 20 - 26, 2009

Is prospect of growth in banking industry in Pakistan bleak or can banks operating in Pakistan cower while taking expansionary plans across the country what their counterparts in developed economies did because of financial downturn-or because they reached to a penetration point where downturn proved just an excuse of rolling back further expansion locally and internationally? Considering a diminutive operational base of banks in Pakistan, it would not muster expert analysis to answer no. Even after taking into consideration all that is known as financial sector including insurance, stock markets, non-banking financial institutions, etc. this base has still huge space to expand to engulf a large number of bankable population of the country.

Therefore, when governor State Bank of Pakistan Syed Salim Raza said with confidence banking industry of Pakistan has immense potential to be explored, he was quiet right as only about 8.6 million people are presently using banking services nationwide. But, his utterance that interests of foreign investors in banking industry have not been dimmed in spite of macro economic imbalances raises some doubts. During nine months of current fiscal year foreign private direct investment in financial business decreased by 28.7 percent to $672.6 million over $942.7 million in July-Mar FY08, according to statistics of State bank of Pakistan.

Unquestionably, this decline was spurred by deteriorating balance sheets of banks in developed countries and now they are taking risk-averse stances. In addition to this, new foreign investors are shying away to take risks in Pakistan. Royal bank of Scotland that has surfaced one of the hard-hit financial institutions amid financial meltdown, witnessed historical loss of 24.1 billion British Pounds in 2008, and thereby was propped up by the government. According to BBC, RBS has announced 2,700 job losses from its UK corporate division. It employed 10,000 employees in a combined Asian operation. "It is likely the announcement will be the largest single tranche of job losses as the company seeks 2.5 billion of cuts in its cost base over the next two years," reported Douglas Fraser in BBC News web cast.

It is true that foreign banks which want to enter in Pakistan or buy stakes in local banks are perhaps least bothered about whether Pakistan achieves targets of current account and fiscal deficits in FY09 or making headways in supply-driven inflationary pressures. What they are most concerned is how to keep cost of provisioning emanating from non-performing loans, etc. at lower ebb and mobilize public deposits in a situation where saving ratio is negligible.

Profitability of commercial banks in Pakistan is on downward trend according to results of last calendar year, decreasing 25 percent to a little over Rs50 billion as compared to Rs66 billion in 2007. Remember, decrease in profits does not imply loss. Actually, they earned profits because of continuous products' diversification and innovation, high spread between rates of mobilizing capital and credits (deposit and lending), and substantial earning on government securities such as treasury bills. The difference was due to decline in flows of private credit. During the nine month of current fiscal year, credit to private sector totalled around Rs111.45 billion as opposed to Rs292.22 billion in the comparable period last fiscal year. State bank associated different reasons to decline in credit to private sector, saying banks were reluctant to disburse credit to private sector during the period and instead enthusiastic in participation in auctions of T-bills.

Performing more than ordinary dual functions of deposit mobilization and advances extension, the banks in developed nations have broadened their description of functions, maintaining portfolios as investment bank, buying debts of countries, managing complicated and sophisticated system of various derivatives in commodities. In Pakistan, though, debt buying has appeared as profitable option as seen in recent thorny issue of circular debts. While initially banks were cautious to disburse loans to Pepco to make it enabled to pay off debts accruing to IPPs, they became somehow ready to finance Rs80.7 billion to godfather of electric distribution companies. Experts believed the development might be risky for banks. However, following rising spiral of loans defaults they are left with no option than to involve in risky affairs of financing government papers and to end debts of public sector enterprises to make use of liquidity. This is not denying the fact that yields on treasury bills is equally profitable for commercial banks rather more than anything else in present circumstances.

Dose this mean that commercial banks are sluing of their basic job responsibilities? Perhaps yes. Temporarily, this could be a timely bet. But, for long term growth in assets, banks have to rejoin primary functions inevitably. The real growth driver lies in serving masses and private sector. Indeed, increasing saving-investment ratio should be driven by expansion of services to private sector. Quenching capital appetites of stock markets is nothing more than an 'unproductive use of money'. Although banks may feel safe return of money invested in shares trading the ratio of investment in stocks and that of in real sectors should tilt towards the later to capitalize on national resources of the economy. Stock market may be one of them if the capital circulating in bourses makes way genuinely in to the economy. It is doubtful if it is done at present as what we see money changes hands umpteen times in stock markets without fulfilling the original purpose for which it is mobilized. Instead of depending on banks' capital, it is better if stock exchanges meet capital demands of private sector.

Addressing banking industry's real issue, State bank's measure of easing benchmark of paid-up capital for banks seems to have synch with dynamics in banking industry in two ways. Firstly, it would give space to small banks to survive and avoid money management risks in case of issuance of right shares to accumulate capital. Secondly, local banks would now have opportunity to strengthen their banking operations by holding shares in recoiling foreign banks. The prospect of growth in banking industry in Pakistan is bright-deposits still are progressing, exhibiting two percent growth in last fiscal year. However, banks need to develop sense of sharing profits with public. Track records of their facilitation services until now are new to public and not special.