BRANCH BANKING - THE JOURNEY OF PRODUCT INNOVATION

SHAMSUL GHANI (shams_ghani@hotmail.com)
Sep 15 - 21, 2008

Banking, as an institution, has grown alongside the expansion in country's economy. Bank business rarely takes place in high-rise bank head office buildings, rather it is created and flourishes in modest small brick and mortar structures known as branches. The concept of modesty may not apply to some of the cosmopolitan city branches, yet most of the branches located in the interior still live up to this concept. In sixties, when HBL, NBP, UBL, MCB and ABL were the major players on the banking front, a bank branch could be as small as a 6'x 5 shop with bare minimum facilities. Most of the accounting was done manually; a simple calculating machine being a luxury that a new branch could have hardly afforded. Mechanization of a new branch was a milestone to be achieved through attainment of a certain growth level. The inter bank competition used to be intense yet decent. The growth of a bank was measured by the size of its branch network besides other quantitative achievements.

The banks were mostly engaged in core business that is acceptance of deposits and profitable lending of depositors' money auxiliary business like domestic and foreign remittance, L/C, L/G etc. notwithstanding. Parallel banking at branch level was considered a banking crime, yet it was clandestinely carried out at head offices by top management on the nod of bank owners / directors. It was the era when no prudential regulations applied to the corporate and business sectors. Major part of country's business was based on double accounting. For reporting purpose, financial statements were prepared that hardly revealed the actual size of the business. The bottom line used to be either in red or a statement of very nominal profits. The top bankers had personal relationships with business and corporate bosses and held their money in trust without placing the same in their respective accounts. In return, business was allowed generous credit lines. The result was that business, in most of the cases, appeared making losses and thus ditching taxes. The money held in trust was distributed amongst bank branches where it was kept as Benami profit earning term deposits. Perhaps this was one of the most dubiously innovative banking products!

Other innovative service and monetary products introduced by the then banking sector are briefly mentioned here below:

* Unit banking: All banking services were offered at a single counter where a well-dressed bank officer attended customers.

* Evening banking: Under this facility, only deposits were accepted during evening hours.

* Drive-in-banking: At certain branches, one could drive to the bank window and get served while retaining his car seat.

* Pak Rupee traveler cheques: Under this facility, one wishing to undertake upcountry travel could purchase these cheques from a bank against a nominal commission. These cheques were en-cashable at all upcountry branches of that particular bank. The service was aimed at eliminating the risk and botheration of carrying cash.

* Computerization: The banking in Pakistan first went from manual ledger keeping to mechanization and then from mechanization to computerization. Today's on-line banking is the latest phase of computerization. To start with, branch ledgers were generated and maintained at banks' head offices. This phase was a mixture of manual and computerized ledger keeping. This facility too resulted in a great deal of efficiency and accuracy at branch level.

Habib Bank was usually known to be the most innovative among peers. It used to report, for a consecutive number of years, profits more than the sum total of other four banks' profits. Its Saving deposit prize scheme created big splashes in the sea of banking. The idea was simple yet highly effective. All saving accounts with a deposit of Rs.100/- or more were entitled to periodic prize draws carrying small to big prizes in proportion to the amount held in the account. Only a portion of profits earned on these deposits was charged to the account as draw participation fee. The scheme was a huge success as customers tried to maintain maximum amount in their accounts. Habib Bank deposits went swiftly up. Since Habib Bank was the exclusive beneficiary of this scheme, other banks lodged protest seeking launch of a similar scheme. The scheme was finally abandoned.

The post nationalization period saw banks spreading their wings to the uncharted zones. Development banking used to be the exclusive domain of DFIs. During eighties, World Bank and Asian Development Banks extended their industrial development credit lines to banks. Other industrial credits like USAid program etc. were also entrusted to the banks. This change added a new dimension to the bank branch working. Separate counters for business and industry seeking foreign industrial credit were opened. Bank branches were normally used to working capital loan processing which required little expertise as inventory securitization was generally used to cover such loans. Use of international credit lines called for detailed project appraisal. Consequently development bankers, engineers, market researchers and economists were recruited and posted at branches. This phase was instrumental in broadening the vision of traditional bankers.

The banks' phenomenal growth demanded prudent use of depositors' money. State Bank stepped in with its prudential regulation regime. The understated business financial statements had to be upgraded to their actual size in order for business to be able to seek bank financing. It was then that the idea of asset revaluation was introduced. The prudential regulation applied as strictly to banks as to business and industry. Banks could loan only up to a certain credit ceiling. Any over exposure held them liable to SBP penalties. It was this scenario when a new banking product parking finance came into being. Under parking finance, the over exposure of bank A was transferred to the books of bank B (or any other financial institution) against irrevocable guarantee (L/G) of bank A.

Zia-ul-Haq era was the germination period for Islamic banking when Islamic products like Modaraba, Morabaha, Mushaika, Ijara (leasing) etc. came into existence. Modaraba and leasing companies floated these products. The nineties saw a gradual decline in the mushroom growth of Modaraba and leasing companies in the face of liquidity problems peculiar to these undertakings. Only those managed to survive who could advantageously secure sizeable domestic and foreign credit lines. 9/11, besides bringing with it huge remittance inflows, saw a marked global shift towards Islamic banking. The business is now said to reaching an amazing target of dollar one trillion. This decade has seen establishment of a number of full fledged Islamic banks in Pakistan. The other domestic and foreign banks have opened exclusive counters / branches to deal with the customers interested in Islamic banking. Flush with liquidity, the domestic and foreign banks indulged in car leasing spree loading the already over-utilized and under-prepared city roads with hundreds of thousands of new cars. Anyway, the product of leasing became a household name for the countrymen. This decade has also seen product innovation touching an amazing level. On-line banking, plastic money and e-banking facilities are few of these products.