May 2 - 15, 2011

Pakistan's banking sector after going through the ordeal of 2007-08 global financial crisis seems back on the track as evident from the recently announced first quarter results of MCBL and National Bank. While National Bank reported a marginal increase in its net after-tax profit, MCBL (Muslim Commercial Bank Limited) registered a 21 percent increase in its net after-tax profit in comparison to the corresponding quarter of the previous year.


Our banking sector's growth reeks of excessive cartelization - a phenomenon that killed fair competition and thwarted balanced growth. The five major banks [unashamedly] boast of generating 98 percent of entire banking industry's profit besides claiming a market share of 85 percent. The smoke screen of mergers and acquisitions created in the name of risk management threatens to drastically narrow down the industry base. Smaller banks, forced to sell their shares at rock bottom prices, are fighting a grueling battle to stay afloat.

Out of 25 banks quoted on stock exchange, only ten are selling at premium. Five out of the said ten banks - those generating 98 percent of industry's profit - command hefty premiums. The remaining four - tier 2 banks on the basis of market price - enjoy from meager to average premium. Majority of the fifteen underdogs are selling at 50 percent plus discount. Does this situation augur well for the banking industry in the long term?


PARTICULARS 2006 2007 2008 2009 2010 MAR 2011
Total Deposits 3,000 3,566 3,801 4,325 5,124 5,046
Total Advances 2,409 2,651 3,141 3,272 3,494 3,474
Total Investments 776 1,211 981 1,645 2,101 2,202
Advances to deposits ratio 0.8 0.74 0.83 0.76 0.68 0.69
Investments to Deposits ratio 0.26 0.34 0.26 0.38 0.41 0.44
Investments to Advances ratio 0.32 0.46 o.31 0.50 0.60 0.63

As previously diagnosed, the narrow-based, clustered growth of banking sector has been made possible by the following policy design structured by the cartelized industry forces:

* Use of brutal cartel force to maintain a high bank spread through shortchanging the hapless herd of depositors.

* Achievement of sustained deposit growth through focus on ever-increasing flow of workers' remittance and captive accounts of federal and provincial government bodies, organizations, departments etc.

* Shrewd use of economies of scale to browbeat competition from smaller banks by making it difficult for them to offer high rates of return to depositors.

* Maximization of profits by drawing on an inapt monetary policy of high benchmark rate.

* Taking care of government's funds requirement for its lavish spending. This allows banks to create extra credit money, which ultimately comes back into the banking system to give rise to bank deposits.

* Risk avoidance through investment in zero-risk and high-return government bonds and securities instead of catering to private sector credit needs, which is a risky and-low-return proposition.

A comparative study of banks' growth statistics for the last six years amply proves the last point. Banks' romance with the government securities for risk avoidance purpose has doubled the investments to advances ratio during the last six years. While the advances to deposits ratio has come down from 0.8 in 2006 to 0.69 in March 2011, the investments to deposits ratio has increased from 0.26 to 0.44 during the same period. This has dealt a severe blow to the private sector. High policy rate and credit contraction has made private sector investors shift to some other venues that offer them the much-needed ease of doing business.

No control over banking cartels in sight, no high policy rate reversal in the offing, no directives to the banks to open up to the private sector, still the government has got something new to offer: a budgetary proposal to increase corporate tax for the banking sector. This will mean much more difficult times for the smaller banks. With their bottom lines unable to take further pressure, their unceremonious exit from the market will be an almost certainty. And, that will be much to the satisfaction of the larger banks who will have a genuine reason to further shortchange their depositors and shareholders. Their shrinking profits will give them an excuse to continue with their policy of steadily increasing investment in the government securities.

The government functionaries behind this thinking believe that we have a low corporate tax rate (applicable to the banking industry) in the region. How great is it to think in terms of regional economic parity. But then what about the highest inflation rate in the region, the highest policy rate in the region, and the highest corruption rate in the region? One should curb one's instinct to devise means to augment revenue through arithmetic exercises. There is a hell of difference between economics and arithmetic. In fact, we have a flat corporate tax rate of 35 percent, which incidentally is one of the highest in the region. We should focus at resolving this anomaly first. Only then, we can think in terms of the banking industry.


Afghanistan 20 - 2-5 Malaysia 25 0 - 26 -
Bangladesh 0 - 45 0 - 25 15 Pakistan 35 7.5 - 35 17
China 25 5 - 45 17 Philippines 30 5 - 32 0 - 12
Egypt 20 10 - 20 10 - 25 Russia 13- 20 13 0 - 18
India 33.2175 0 - 30 2 - 12.5 Singapore 17 3.5 - 20 7
Indonesia 25 5 - 30 10 Taiwan 17 6 - 40 5
Japan 40.69 5 - 50 5 Thailand 30 5 - 37 7