May 12 - 18, 2008

Foreign banks have substantially increased their share in Pakistani banking system during the last five years. According to Governor State Bank of Pakistan, in 2007 foreign stake comes to 47% of total paid-up capital of all the financial institutions regulated by State Bank. Pakistani banking assets in last five years have grown from Rs2,223 billion to Rs4,884 billion; advances from Rs1,062 billion to Rs2,603 billion; and deposits from Rs1,678 billion to Rs3,691 billion

During 2007 foreign banks were far ahead of local banks in enjoying benefits of wider banking spread that was 8 % in May 2007 which remained the cause of yawning interest by foreign investors in the country. Official data shows that in mid 2007, the lending rate of foreign banks was 13.8 % while deposit rate was 5.45 % per annum. The banking spread for the same month was 8.36 %. These figures exhibit the fact that these banks secured real profit after deducting 10% inflationary impact. Nevertheless depositors remained wretched by obtaining a negative return on their deposits. They succeeded to fetch 5.45% as against over 10% core inflation. The spread of foreign banks was highest among all banks as average banking spread of all banks was around 7 %.

The role of foreign banks in the industry became conspicuous after enhanced M & A activity. This activity driven by SBPs increased Minimum Capital Requirement (MCR) gave cushion for increased profitability and market penetration at the time when share of foreign banks in the banking sector was still not more than 12 to 13 %. Consolidation of smaller banks made them vital amongst local banks. The foreign banks, which increased their share by acquisition of Pakistani banks, charged more from lenders, but passed on less profit to depositors. However, now the spread of foreign banks which was 9.99 % in November 2006 has started coming down. The comparative study shows that foreign banks have been charging highest from borrowers. The lending rate of foreign banks was rising since October 2006 which was 13.1 % and reached 13.75 % in November 2006. It was highest in January 2007 reaching 13.88 %. Despite greater competition to attract deposits, the foreign banks kept the deposit rates much lower than the banking spread.


Foreign banks were pioneer in consumer banking and this sector pays highest return to banks which pushed banking spread higher than all banks. Citibank having the world's largest branch network with operations in over 100 countries initiated consumer banking from their credit card division in Pakistan. The highest banking spread maintained by foreign banks was a major attraction for foreign banks to enter into Pakistani market. So far major players in this arena are Standard Chartered Bank, ABN Amro, Citibank, Barclays, HSBC and NIB Bank. They have expanded their operations in Pakistan while more banks are looking for an opportunity to initiate their banking in the country.

World's second largest bank, Barclays, entered Pakistan as it received a license from the State Bank in December 2007. Earlier, the same bank held negotiations to acquire a Pakistani bank, but the deal could not materialize. The bank, which witnessed a tremendous financial growth in the last five years, however, got the license to operate in the country. Initially, the Barclays will invest $100 million and establish 10 branches in the main cities of the country. It is a good omen that world's prestigious financial institutions like Barclays Group, are showing a keen interest to invest in Pakistan.

However, there is a realization among banking regulators that the high banking spread is an exploitation of depositors who did never get positive return in real terms. The State Bank has been showing concern asking banks to increase the return on deposits but no action was taken. The average banking spread of all banks has been gradually coming down since February 2007 when it was 7.47%. Foreign banks are also following the guidelines laid down by SBP.

Foreign banks have been introducing new products with every passing day. In this regard, the mobile banking has become a very useful tool to attract accountholders as it keeps their accounts on their fingertips. The foreign banks were offering mobile banking as soon as it was introduced in their countries. Mobile banking is now provided by majority of the commercial banks. MCB was first among the denationalized banks to offer this service. In mobile banking services, the commercial banks have been providing service about the funds transfers, use of depositors account, balance check, use of ATM and credit cards and payment of utilities bills through mobile banking. Mobile banking is also being used as a tool of corporate marketing as well. The commercial banks send SMS alerts to their consumers about the forthcoming products. Under present competitive environment only banks offering latest facilities would survive.


There has been a growing foreign interest. Existing foreign banks have by and large enhanced their presence and stake in Pakistan and some new foreign banks have entered for the first time. Since the year 2001, 36 M&A have taken place. At present foreign stake comes to 47% of total paid-up capital of all the financial institutions regulated by State Bank. The banking system continues to invite the foreign investors' interest in Pakistan and attracts significant share of direct foreign investment on the back of excellent results.

The most sizeable deal of $513 million was struck by the Standard Chartered Bank which acquired a mid-size strong local bank (Union Bank). For the first time the financial sector in the country has emerged as the leading sector in attracting foreign investment. In seven month of FY-07 (July-January) the financial business has fetched 553 million dollars worth foreign private investment, the highest-ever as compared to other economic sectors in the country. This sizeable transaction has motivated many foreign financial institutions to divert their attention towards the rapidly-growing banking sector in the country and others such as Citibank are also contemplating acquisitions. Worth noting is that the NIB Bank, a subsidiary of Singapore-based Tamasek Group, has acquired majority stake from major shareholders in the PICIC (Pakistan Industrial Credit and Investment Corporation). National Investment Trust and Crescent Group have major stake in the PICIC. Similarly, ABN Amro Bank in Pakistan has sealed a deal with Prime Commercial Bank to acquire majority stake that would lead to expansion in the network and operations of the foreign bank. Likewise, Citibank is also probing Soneri Bank with the aim to buy the operations of this small size Pakistani bank. This M&A wave will help further consolidate the banking sector. Principally driven by high investor confidence and economic prospects, the current M&A wave is also triggered by the need for banks to meet higher capital requirements and also growing competition which will make it increasingly difficult for small banks to survive. Together the growing trend of M&A and issue of GDR of MCB Bank at the London Stock Exchange have attracted close to $1 billion inflows and another equivalent amount is yet to flow in.

The State Bank of Pakistan granted a banking license to Barclays Bank Plc, UK to conduct banking business in Pakistan. The entry of Barclays in Pakistan would not only strengthen banking system of the country, it would also bring a significant amount of foreign direct investment and technology to launch innovative financial products. The entry of Barclays in Pakistan reflects the confidence of foreign banks in Pakistan's banking system. It will be the seventh foreign bank operating in Pakistan in branch mode, in addition to a number of foreign banks having locally incorporated subsidiaries. The robust profitability, strong solvency profile, managed asset quality, better risk management practices and ongoing consolidation of foreign banking system have witnessed improvement in almost all the key financial performance and soundness indicators.


Growing market share of foreign banks in local banking industry has compelled the other banks to raise their service standards to the global level. Entry of internationally recognized banks has infused a new customer base in the system and modern banking services including car financing, credit cards, home finance, personal loans, consumers durable finance, which were previously confined to trade and industry people only. Commercial bankers have been increasing their exposures in consumer banking. As a result of innovative products and triumphant result there is a cutthroat competition among commercial banks to attract maximum number of consumers.

The financial experts and analysts see a vast potential of growth of investment and business in the financial sector in Pakistan in the wake of sustainability in annual economic growth in the range of 7-8 per cent in next five years and this trend could move forward in case the economy did not face any political or any other unforeseen shock in the near future. They are also predicting a stiff competition between the local and foreign banks in Pakistan in the years as the ongoing tough competition would persist in the banking sector because of bankers bid to capture maximum customers, enhance their lending by offering new and innovative financial services and products.