BANKING ON RELATIONSHIPS

SHAMSUL GHANI
(feedback@pgeconomist.com)

Mar
29 - Apr 4, 2010

Corporate banking, during its journey through the decades, has undergone structural changes to transform itself from the olden days' relationship banking into the modern-age professional and high-tech delivery system of financial services.

The concept of relationship banking gained popularity in the earlier days after Pakistan's creation. This concept essentially relied on winning customer loyalty on the basis of communal, ethnic, regional, or business linkages rather than the service quality or competitiveness. The pioneer of this concept was Habib Bank that had started functioning in India in 1941. Its owners coming from a reputable Gujrati-speaking business community had vast business ties in India, especially with the Muslim businessmen. These business communities, after migrating to the newly created Pakistan, instantly established banking relationships with Habib Bank. Most of the business people who settled in Karachi were Gujrati-speaking businessmen who had no hesitation to choose Habib Bank as their banker. This was logical and realistic as the only other local bank in operation at that time was National Bank, with the status of a government-owned entity.

The role of Habib Bank in Pakistan's economic development can never be ignored. Immediately after the partition, its owners offered unlimited and unconditional financial support to the Quaid. It was the nursery of Pakistani bankers, the majority of whom gained prominence and left their mark on domestic as well as international banking fronts. Habibians were bankers to the core. They were not the followers of sophisticated marketing theories and techniques but knew their job well. They believed in high quality service and constant extension of their outreach. Their financial management was meticulous. They would open branches in the farthest regions and remotest possible areas and take minimum time to make their operations profitable.

During those early days, one would hardly hear of corporate customers. They were all just businessmen. The branch agent - afterwards renamed as branch manger - was supposed to be seated just at the entrance to offer customers an instant interface. The valued clients - those having big money deposits or enjoying large credit facilities - would invariably be seated with the manager who would see to it that the working staff provides the required service while the client enjoyed a cup of tea. The time is well remembered as "personalized banking service" era.

It was with the entry of United Bank that the banking in Pakistan went into the competition mode. Its founder Agha Hasan Abedi, an ex-Habib Bank-executive and a corporate banking genius, introduced revolutionary changes based on a high degree of professionalism. He gave the banking a modernized look. Besides helping trade and industry, he paid great attention to the uplift and upbringing of the bank personnel by offering them excellent pay structures and asking in return a well-groomed personality outlook to attract and impress the bank's high profile clientele. Unit branch banking was one of his revolutionary marketing strategies according to which well-dressed, tie-wearing bank officers were to be installed at counters to look after the entire banking needs of customer on one-window-operation basis.

Agha Hasan Abedi, after the nationalization of banking industry in Pakistan, founded Bank of Credit and Commerce International (BCCI) with the Bank of America as its major shareholder. With its head office in the Luxembourg, BCCI started its operations from a two-room London office. Within a short time, it developed into a world class international bank with presence in 72 countries and 16,000 employees on roll, 80 percent of whom were Pakistanis. It was Abedi and his talented team that took BCCI to great heights in the shortest possible time. The US business magazines never tired of showering praise on this corporate genius. He had the vision to realize the economic importance of oil boom and played an important role in bringing Pakistan closer to UAE and other gulf states. With the shift in the US interests, how this genius was later on maligned and implicated in money laundering cases, is the saddest chapter of our corporate banking history. He was blamed to have engineered a convoluted corporate structure with a maze of subsidiaries and organizations to circumvent international corporate and banking laws. This is ridiculous. If one man can defeat the entire international legal system, then the system is not worth the name. After a protracted illness, the genius had to die a tragic death in Karachi, in 1995. Very few people in this country know that most of the profits of BCCI were used for philanthropic activities.

Banking sector activities were regulated from the inception by the State Bank of Pakistan, but its monitoring was not as tight and meticulous as it would appear now. As an offshoot of relationship banking, the banks used to accept off-the-record deposit of large sums of moneys by the then corporate sector - mainly comprising traders and businessmen - and in consideration extending to the business of the depositors sizeable credit limits that properly appeared in the records of the borrowers and the lenders. This system afforded stashing of corporate sector black money on one hand and highlighted corporate sector borrowings on the other, to justify corporate tax evasion as the business either showed a nominal profit or a loss. It was not until the banks were allowed access to international lenders' foreign currency credit lines for business and industrial investment that the State Bank started tightening its noose. Since the foreign lenders attached to the credit lines certain covenants that warranted meticulous monitoring of the lent funds, the State Bank had to make a review of the situation. It was the era when the prudential regulations became the talk of the town.

The information explosion that has taken place during the current decade has also radically reformed both banking and corporate sectors.

Today, speed is the order of the day. Online banking, electronic money transfers, credit cards, ATM machines etc. have redefined the role of corporate banking on one hand, and communication and trade options like cell phone, fax, e-commerce etc. have revolutionized the corporate sector activities on the other. However, even after the passage of more than six decades the primary nature of the relationship between the two sectors has not changed. They remain inter-dependent. The efficiency of systems has only reaffirmed this relationship.