July 12 - 18, 20

It may not be wrong to say that of lately massive foreign investment has been made in the financial services sector, particularly commercial banks. Now half of the two dozen commercial banks listed at the local bourses enjoy substantial foreign investment. Foreign investors also have stake in insurance companies as well as takaful entities. It is believed that more of foreign investment could be attracted by arranging road shows and presenting the case of smaller commercial banks seeking additional capital to meet the minimum capital requirement of the central banks.

Foreign investment in Habib Bank, United Bank and Bank Alfalah is the outcome of privatisation pursuit followed by the government of Pakistan. Standard Charted Bank enjoying more than 150 years presence in Pakistan was encouraged to opt for listing at the local stock exchanges and also acquire Union Bank to enhance its outreach. ABN AMRO Bank acquired Bolan Bank, which became The Royal Bank of Scotland (RBS) after the global merger and now going through formalities to be taken over by Faysal Bank. Sponsors of MCB Bank sold part of their equity to a Malaysian bank. Samba Group of Saudi Arabia not only acquired majority holding in today's Samba Bank but also injected additional equity to meet the minimum capital requirement stipulated by State Bank of Pakistan. However, Suroor Investment of the Middle East seems to be the most active player in Pakistan as it has acquired substantial stake in two commercial banks and is also busy in completing the formalities for acquiring substantial stake in Mybank. Temasek of Singapore has not only acquired substantial stake in NIB Bank but has also taken over the entire Right Issue offered to general public for meeting the minimum capital requirement. Silkbank also have substantial holding from the overseas investors.

The growing interest of foreign investors in Pakistani commercial banks has attracted contradictory response from the sector analysts. The supporters of this strategy say that the GoP policy has attracted huge foreign investment in the sector leading to massive investment in technology and enhancing outreach. However, the opponents strongly believe that allowing foreigners to have substantial stake is like granting permissions to conglomerates, which are the improved version of East India Company of the colonial era. They also say that permission by the central bank to the commercial banks to set the service charges, have allowed the banks to follow innovative ways of fleecing the account holders in the name the penalty for not maintaining minimum balance, debt card fees and cost for using ATM of another bank and online charges. Incidentally, all these services were introduced in the name of 'improving quality of services' but the cost of these services has become punitive for the account holders. Many of them say that even if this fleecing is reported to the central banks, it prefers to remain silent. It may or may not be true but resignation of Syed Saleem Raza from the governorship of State Bank of Pakistan is also being attributed to a complaint by the country head of a foreign bank.

A factor mostly not looked into is the repatriation of profit by the commercial banks. The general perception is that over the years these banks would repatriate profit many times the quantum of much talked about foreign investment. However, closer look at NIB Bank and Samba Bank sagas should be cause of concern for the regulators. Over the years, these banks have been posting either a meager profit or incurring loss. Therefore, not only the shareholders have been denied a modest return on their investment but likelihood of the foreign investors taking an exit is on the rise. It may not be wrong that the central bank has become a little sluggish in enforcing Prudential Regulations or have been forbidden to take stern action against the foreign investors. To say the least account holders have gone low on the priority list of the regulators.

According to a report by ADK Securities nine banks had failed in meeting CY09 minimum capital requirement as of June 30, 2010 even after deadline extensions. Shares of these banks are being traded at huge discount, despite some having already initiated steps to meet the requirement. This is because a stipulated timeline to meet the enhanced requirement of Rs13 billion in CY13 makes raising capital an ongoing exercise over the next three years. While the prevailing situation offers opportunities for mergers and acquisitions, not much success has been achieved to date.

In a scenario where capital constrained banks fail to attract stronger banks and also fail to merge within peers, the realistic options available to the central bank other than extending the deadlines are not to insist on enhancing capital or force mergers. However, it is believed that the central bank would abstain from taking any harsh measures.

Two of the observations of the banking sector deserve specific mention. It has been observed that some of the banks create almost havoc at the Treasury Bills auctions. They not only submit huge bids but also demand higher interest rates. It seems that these banks are not keen in extending credit to the private sector but create an impression that they are the saviors of the government, desperate for borrowing no matter at what cost.

It may be one of the rare incidents that some of the banks refused to buy term finance certificates being issued to resolve inter corporate debt of the energy sector. However, prompt action by National Bank of Pakistan to extend credit to the KESC highlighted the difference in the mindset on private and public sector players.