Dec 21 - 27, 2009

Small and medium seized banks have been looking towards saviors since the uptick in minimum capital requirements by the State bank of Pakistan.

State bank is encouraging mergers and acquisitions to promote healthy competition in the banking sector. To stay in the business, small and medium sized banks have two options: issue right share or be swallowed by another bank.

Most of the capital-seeking banks for survival are apparently opting to issue right shares, often accepting transfer of majority stakes to investors. Recently, Atlas bank limited agreed to sell its 58.31 percent shares to Mauritius-based Suroor Investments limited. Samba (formerly knows as the Saudi American Bank) issued right shares in public to replenish capital stocks.

State bank of Pakistan increased the minimum paid up capital requirement for all locally incorporated banks to Rs23 billion (net of losses) to be achieved in a phased manner i.e. Rs6 billion by Dec 2009, Rs10 billion by Dec 2010, Rs15 billion Dec 2011, Rs19 billion Dec 2012, and Rs23 billion by Dec 2013.

Mauritius has been a top investment country from Africa for Pakistan. It invested in different sectors of Pakistan and until last fiscal year foreign direct investment from the country remained significant. However, so far in this fiscal year no investment from the country has been realized. In fact, in the first five months of this fiscal year Mauritian investors withdrew $35.8 million from Pakistan as against investment of $165.7 million in the similar period last fiscal year. Suroor Investments bought major shares of Arif Habib and Malaysia's Maybank at the start of this year.

Investors are interested to invest in the banking sector of Pakistan because of the windfall profits it offers to them. Besides, regulations of the central bank are considered as an inducement to investments. Potential of untapped market share can be of no use to banks if State bank tightens noose around the investors. Indeed, investors-prone regulations are underlying element that has promoted investments in the banking sector of Pakistan, and that underpins banks under distress of deterioration of assets to realign balance sheets. Banks turned to investments in securities after they faced significant growth in non-performing loans. But, as advances constitute profitable portfolios of banks, they ought to come back with capacity to ingest high provisioning. State bank's permission to them to take 30 percent of forced sales value of securities under lien for calculating provisioning requirement was a welcome measure.

Participation of foreign investors in Pakistani banking and financial sector has been exuberant over a time. This gave a boost to mergers and acquisitions. Banks, which could not meet the minimum capital requirement or found themselves dwarfed amidst market share devouring gigantic competitors, went in to merger with another.

Apart from the apprehension of foreign banks to ultra-national model of local banks that smacked of cartelization, Pakistan's was (and is) altogether a promising market for local and foreign investors.

At present, it seems that foreign investors are fast losing the elevated spirit once they were filled with of entering Pakistani financial sector. The nosedive of foreign investments in financial sector reflected this dejection during the first five months of current fiscal year. Foreign investments in financial business stood at US$18 million in July-November, 2009 as against US$444.1 million in the similar period 2008, a decline of 95 percent. The change in mood is attributed to numbers of factors, important being security risks.

Despite improving macroeconomic fundamentals and investment friendly prudential regulations for commercial banking, foreign investors have limited their exposures to portfolio investments in the capital market, albeit some investment companies are acquiring shares in local banks. It is equally notable foreign banks which want to enter in Pakistan or buy stakes in local banks are perhaps least bothered about whether or not Pakistan achieves targets of current account and fiscal deficits. What they are most concerned about is how to keep cost of provisioning low and mobilize funds.

Taking time out from the world's financial crisis, investment banks are in quest of new avenues in global financial system to create a shield against liquidity crunch by diversifying portfolios, which can lead them to world domination or breakup.

Since US and EU are struggling to tap tax money to repair balance sheets of banks- some of the biggest recipients of bailouts are RBS, Bank of America, and Citigroup- and restructuring of banks, investments from middle east or by Shaikh can be helpful in meeting the needs of capital.

China, an emerging financial behemoth, can win the race of serving the needy. Mergers and acquisition's frenzy in Pakistan can nudge aspirants to lend capital in the country. They are overcautious however about the sudden default Dubai's World experienced out of the blue.

State bank of Pakistan has devised clear guidelines and articulated its desire to develop efficiency and healthy competition in the banking sector of Pakistan. That implies there is no place for small banks in the future banking. An apparent logic of driving out small banks is that banks with the prescribed capital alone will be able to serve customers in efficient and effective manner under guided principles. This will also make regulatory measures more effective. Above all, this will mitigate the risk of financial crash and make banks avoid failure.

However, shrinking space for small banks may culminate in oligarchy in banking sector and thus it means death of fair competition rather than the opposite. When control is concentrated in few hands, elitist predispositions are preferred over socio-economic exigencies.