Apr 20 - 26, 2009


(Rs. Billion)

31-12-2009 6 6
31-12-2010 7 10
31-12-2011 8 15
31-12-2012 9 19
31-12-2013 10 23
Source: SBP

The small banks in Pakistan must have taken a deep breath after the State Bank Circular on 15th April 16, 2009 announced an about 50% reduction in minimum capital requirements (MCR). The banks are now asked to increase in phases minimum paid-up capital of Rs. 10 billion instead of Rs. 23 billion by December-end 2009, but the minimum capital adequacy ratio is maintained at 10%.

The measure will definitely help the small banks to be on the ground, participate in the growing market competition and help consumer spending and corporate productions to grow.

But this might have some negative implications for the stock market as the investors were expecting right shares to be issued by banks to meet the capital requirements. The right issues would have helped the market liquidity to grow and meant higher business for bourses. But the State Bank's decision has seemingly dampened their expectations.


Pakistan's economy enjoyed a robust growth of 7% on average for the last 5 years until FY07 and then onward it started to bow down to slowdown in global economy and financial markets and highly fluctuating oil and commodity prices. For the last two years, inflation has hopped at its three-decade high annualized CPI inflation rate of 25%, foreign exchange reserves have been at lowest position since 2002 of below US$9.13 billion, which has now improved to US$11 billion, and the rupee is down 25% against dollar worst since 1998 at around Rs. 82 per dollar. Pakistan's economy will move with an expected growth rate of 2.8%, which shows how badly the economy has been hit.

The economy had already shown signs of weakness during late FY07 and to address the economic issues, the policy makers in Pakistan resorted to fiscal and monetary tightening since the start of the FY08. As a result, we witnessed slowing demand & supply in the market due to high cost of credits. The situation was worsened by soaring costs of business and high power generation and raw material costs. All this hampered the manufacturing sector and ultimately the banking sector growth, which is the credit source for the all economic development in the country.


To address the inflationary pressures the State Bank of Pakistan increased discount rate to 12%, by a cumulative increase of 350 bps since start of FY08 and to 15% during FY09 and Cash Reserve Ratio (CRR) & Statutory Liquidity Requirement (SLR) for banks were increased to 9% and 19% (previously 7% & 18%) respectively. The minimum return for depositors on banks' PLS accounts was raised to 5% per annum and NSS rates revised upwards by 200 bps. These steps squeezed the banking spread, profitability, liquidity and business in the country, hampering all economic activities.

High borrowing costs have minimized consumer and business loans, while high inflation has reduced saving power of individuals, thereby disturbing banking sector's performance.


Fiscal policy measures were further intended to control the increasing consumer credit trend and the Government of Pakistan resorted to:

Increase FED on banking services from 5% to 10%,

Increase withholding tax on withdrawals to 0.3% from 0.2%, and

Scrap the deductions on non-performing loans which were earlier allowed by the SBP

. 15-APR-09 DEC-08 DEC-08 CY08
NIB 40,437 8,327 19.50% (7,475)
SCBPL 38,716 1,905 10.80% 676
RBS 17,180 (2,690) 11.70% (518)
BAFL 13,492 3,166 8.00% 1,301
UBL 11,129 17,256 10.30% 8,445
HBL 9,108 24,243 13.60% 15,614
SPCB 9,003 219 8.00 90% 15,684
SBL 8,770 43 55.10% (742)
HMB 7,528 7,040 10.40% 3,277
ABL 7,110 5,805 11.10% 4,094
MCB 6,911 36,772 16.50% 15,323
JSBL 6,128 18 28.90% 55
BAHL 6,101 3,079 11.30% 2,367
FABL 6,091 3,790 9.60% 1,115
MYBL 5,304 324 17.30% (350)
BOP 5,288 n.a n.a n.a
BIPL 5,280 - 41.40% (48)
AKBL 5,073 7,689 9.40% 415
SNBL 5,019 2,017 12.70% 701
BOK 5,004 1,436 16.70% 137
ATBL 5,001 580 11.5% (1,071)
AHBL 5,000 n.a n.a (191)
MEBL 4,926 869 10.60% 156
KASBB 4,015 151 11.6% (1,364)

Thus, the measures increased the current tax liabilities of banks and its users, which adversely affected banking sector's performance.

The sector has been one of the victims of the economic contraction. The banks under pressure squeezed their business and some of the departments of many banks were shut down. The sector witnessed some of the high rate of layoffs but the layoffs were less than other financial sectors like stock brokerages, mutual funds, and other related businesses.

The latest financials are showing slight improvement in banking system. According to latest numbers released as on Mar 28, 2009 the deposits of the banking industry in total have reached Rs3.9 trillion, depicting a growth of 2% from Rs3.8 trillion at the end of FY08, while the average deposit growth for the last five years has been 3.5%.

Investments on the other hand have shown good momentum after witnessing a fall of 19% in FY08. The banks' investment portfolio normalized to its natural levels as investments increased by 17% to Rs1.1 trillion as of Mar 28, 2008.

Banking sectors' credit off take is still under pressure, as the gross advances to deposit ratios have gone down by 3% to Rs3.1 trillion until the period.

The recent IMF report has praised Pakistan banking industry and its resilience to the worsening economic conditions.

"The most of the Pak-banks, including all large banks, would remain solvent in severe crisis scenario," according to stress tests conducted by IMF & World bank on FY-08 data, quoted in the recent IMF report released for Pakistan. The report further says, "The banking system appears to be generally well-capitalized and liquid".


In a general global and domestic economic slowdown, the (real) credit off take will remain tight and therefore, spreads are likely to remain under further pressure. There is still room for further penetration of financial services, which will provide many opportunities for the banking industry to grow.

Further monetary tightening is expected to be continued for the remaining period of 1H-CY-09, where discount rate may remain between 13 to 15 percent. This will not let the economic growth to pick the pace and will affect the banking sector performance during the financial year.

The banking regulations in Pakistan are being improved to match global standards and this implication will attract the foreign capital inflows in the country in the form of FDI and successful mergers and acquisitions.