CONSOLIDATION IN BANKING SECTOR

A CLEAR LINE OR STANDARDIZATION IS SOUGHT BETWEEN LOCAL, FOREIGN BANKING REGULATIONS

TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Sep 15 - 21, 2008

Both local and foreign led mergers and acquisitions in banking sector in Pakistan are playing healthy role in enhancing efficiency of financial services, governance system, fair competition, probabilities of products innovations and introducing modern techniques in rationalizing modes of lending and borrowing to bring into net hitherto underserved target markets. It is worthwhile to consider the observations of experts who associate uninterrupted performance of national banking sector with the predefined jurisdictions of local and foreign financial laws.

A clear line or standardization is basically sought between local and foreign regulations on banks; failure to which may create confronting situation. Foreign banks, which are acquiring shares in Pakistani banks and are headquartered across the border, are strictly adherents to central policies and invoke them equally in banking operations worldwide. How effective would then be provisions of State Bank of Pakistan in regulating all equitably?

Central bank is revered for its pivotal stature in giving guidelines to economic recourse and making policies in relation to micro and macro economic functioning all around the world. No matter how big does a foreign bank acquire stakes in local operation, it needs to be adaptable to local central provisions while devising strategies.

Welcoming knowledge from abroad is good, but it should not pollute the local financial structure, says an employee of a local bank. International financial institutions normally sanctify to global regulatory framework, "and expect the same from all operating branches", he says. Despite that foreign banks' branches operating in Pakistan follow rules and guidelines of State Bank, they equally could not condone over banking procedures in their home countries, he told. The apprehension is about overriding mixture of foreign regulations in local. The consequence might be suppressing to local banks overshadowed by foreign entrants, opines he.

The merger and acquisition in banking sector of Pakistan is alike fast and furious and rapidly evolving. Alone in a year three mergers have taken place in commercial banking sector and enlarged the capitalization of banks. M&A activities caught its pace after the restructuring of rules of State Bank. Stirred by the new rules that bind banks to increase paid-up capital, instances of joint venture, M&A between local-local and local-foreign banks have fast appeared. Sharing in management control magnifies the capital base besides operational efficacy of banks. Globally, the trend has shifted towards M&A, reflecting in the banking sector of Pakistan. Sometimes this change of or sharing of ownership is amazingly swift. For instance, soon after ABN acquired the banking operation of Pakistani Prime Bank, its Pakistan operation was occupied by a consortium led by Royal Bank of Scotland.

According to the governor State Bank, "financial sector stability has been further fostered by strengthening of banks' system-wide capital base to Rs. 372 billion. Process of consolidation has been catalyzed by 30 mergers and acquisitions, moratorium on licensing of conventional banks, and rise in minimum capital requirements for banks and DFIs". As per Basel II regulations, she said, banks have initiated implementation of the standardized approach.

Foreign banks arrival in Pakistan is just in time to support to depleting foreign reserves that has plunged down to below $9 billion from above $16 billion in a period of one year, falling at a rate of $800 million a month. Foreign investment is not landing only in banking sector but in overall financial sector. Note that overall financial sector has been the second largest recipient of FDI after communication sector in last fiscal year. Along with provision of capital to the economy, this has also allowed local banks to learn from international financial system expertise. The last landmark deal has been signed between Muslim Commercial Bank and Maybank, which is the top class bank of Malaysia. Only 15% stake holding by the bank in MCB brought in $700 million in the country that likely to be increased as there is chance of acquiring further shares in MCB by Maybank.

MCB Bank has 8 per cent market share and more than 4 million customers. In past five years, its net loans have grown an average 23 per cent annually, while pre-tax profit has increased an average 58 per cent a year. It has consolidated its lending business in 375 branches and long term plan to rationalize its strategy with reference to SME, consumer, and corporate banking. The acquisition was the third in line of mergers in commercial banks during last one year in the country.

A consortium led by Shuakat Tarin has acquired Saudi Pak Bank while PICIC Commercial Bank has been renamed as NIB after merger. The merger has resulted in NIB Bank becoming the seventh largest bank in the country in terms of distribution network with 240 branches and total assets over Rs. 185 billion. Presently, NIB is said to be the second largest capitalized bank in the country with a paid-up capital of over Rs. 27.5 billion.

Over the years, the activities of M&A have also boomed in domestic banking sector. Large banks are acquiring or merging with small banks, allowing them to meet increasing requirement of paid-up capital, which is to be increased to Rs. 23 billion by 2013. According to SBP, the banks will need to have minimum paid up capital of Rs. 5 billion by end of 2008; Rs. 6 billion by end of 2009; Rs. 10 billion by end of 2010; Rs. 15 billion by end of 2011; Rs. 19 billion by end of 2012; Rs. 23 billion by end of 2013. Branches of foreign banks are also required to increase capital to Rs. 23 billion within the timeline.

Hopefully, the M&A exercises will keep on bettering the efficiency of banking sector of Pakistan and increase variety of banking solutions with consumer-oriented approach to public. Importantly, foreign banks must toe the regulatory line of national financial laws in course of scoring market share and not be allowed to make engineering in provisions.