The paradigm shift in the commercial banking seems to
have started positive results. Growing deposits and ever increasing
appetite for credit by the private sector have provided the added
impetus. Low interest rates are encouraging the existing players to
expand their installed capacities as well as to undertake greater value
addition. The vibrant equities market also allows the bank to make large
capital gains as well as draw substantial dividend income from their
investment portfolios. The only concern is, how will the interest rates
move in the near as well as long term?
A closer look at the financial accounts released by
commercial banks for the year ended December 31, 2003 shows that despite
low interest rates and persistently growing operating expenses, all the
players have been able to posted results better than previous years. One
of the factors contributing to improved profits was the reduction in tax
rate applicable on banking companies.
The increase in operating expenses can be attributed
to the ongoing branch expansion programme. Another factor responsible
for higher operating expenses is the massive investment being made in
upgrading the existing branch network and substantial investment being
made in technology. The private banks have been fully cognizant of their
limited branch work. To overcome this limitation they are relying
heavily on technology. The concept of 'bricks and mortar' branch is
being replaced by e-banking.
Another emerging phenomenon is 'dying commercial
banks and emerging financial super market'. Historically, commercial
banks in Pakistan have been maintaining checking accounts, providing
working capital loans and offering international trade related services
and financing. However, over the last decade they also ventured into
leasing, housing and consumer finance. Though the quantum of income
generated through these activities is still low, the growth in business
volume has been very significant. Since the pie size is very large only
the policies of an institution limits its share.
Lately, Pakistan witnessed the establishment of a
commercial bank offering commercial banking based on Sharia. The
response has been overwhelming to the extent that most of the banks have
either established separate windows for Islamic Banking or are in the
process of opening dedicated branches. Most of the banks were not able
to identify the size of Islamic banking market and the potential
response from the clients, despite pressure for eliminating Riba from
banking. They chose to offer Islamic Banking in parallel with
conventional banking and allowed the clients to make their own choice.
The response from the clients has been beyond expectations.
Another emerging phenomenon is constantly growing
investment in equities and term finance certificates. Historically,
banks have been investing mostly in government securities. Two factors
were responsible for this prachee, virtually no risk and higher yield.
However, lately government has become no longer the biggest borrower
from commercial banks and yields have also gone down exceptionally very
low, from as high as 12.5% to as low as 1.5%. This forced the banks to
explore other high yielding opportunities. A vibrant equities market and
attractive dividend yield attracted the banks to take greater exposure
in relatively high-risk options.
However, there was severe criticism on banks'
exposure to equities market. The growing fear was that most probably a
bubble was emerging, which might burst any time. Therefore, the central
bank, as a precautionary step told all the banks to follow the
Prudential Regulations, pertaining to the investment in equities.
However, to avoid any run down, banks have been given sufficient time to
bring their investment within the stipulated limits.
According to a banking sector expert, "It was a
very difficult decision to make. Had the bank opted to sell a large part
of their portfolio, the share prices would have eroded, which would have
been bad for the banks as well as the equities market. Therefore, they
had to look for some other option, whereby the losses could be minimized
without creating bearish spell in the equities market. This option has
become evident if one looks at the number and size of mutual funds being
floated. Some of the large funds have been floated most recently and the
collective size of funds in the pipeline is estimated around Rs 15
According to another analysts, "It is the most
appropriate time to enhance minimum paid-up capital requirement for
commercial banks. The minimum capital should be raised to Rs 1.5 billion
by end 2004 and to Rs 2 billion by end 2005. The shareholders' equity of
most of the banks already exceeds the suggested limit. However, the
additional capital should only be raised through issue of Right Shares
at a price close to quoted prices".