Aug 15 - 21, 2011

While many of the sectors of Pakistan economy are going through the rollercoaster rides, commercial banking has posted consistent growth.

With the permission to allow the private sector to establish commercial banks, domestic banks have emerged stronger. In the distant past, there were less than half a dozen domestic banks, which had to compete with two dozen foreign banks.

The situation has reversed because over two dozen commercial banks are now listed at the local stock exchanges. Many of the foreign banks sold off their local operations.

A major sign of the growing strength of domestic banks is that overseas investors are taking stake in these entities but management remains within the control of local sponsors. History spread over six decades can be divided into different eras: pre-nationalization, nationalized and liberalized. Habib bank enjoys the distinction of being the first Pakistani bank and the family, which no longer owns this flagship bank but owns and manages banks locally and internationally.

During the regime of Zulfikar Ali Bhutto, banks were nationalized and five major entities were created namely: 1) National Bank of Pakistan (NBP), 2) Habib Bank, 3) United Bank, 4) Muslim Commercial Bank and 5) Allied Bank of Pakistan. These banks are still known as 'Big Five' and all except NBP have been privatized.

A major policy decision came in the shape of listing of NBP on the local stock exchanges and offering of its shares to the public under privatization for people program.

In nineties, when the government of Pakistan (GoP) opted for deregulation, liberalization and privatization about a dozen permissions were granted to the private sector to establish commercial banks. While some emerged stronger with the passage of time, the weaker players were acquired and merged by the robust players. Some of the local banks also acquired Pakistan operations of foreign banks and some smaller players amalgamated to achieve greater synergy.

A compete paradigm shift in banking came when the PML-N government in 1998 decided to freeze foreign currency accounts after imposition of economic sanctions as the country proved itself an atomic power. In a hasty move, many foreign banks sold their Pakistan operations. Major mergers and acquisitions included acquisition of Pakistan operation of Bank of America by Union Bank. The ownership of Union Bank also witnessed quick changes and it was finally acquired by Standard Chartered Bank, which opted for listing as a domestic bank at the local stock exchanges.

SAMBA Group of Saudi Arabia acquired Crescent Bank and also injected huge equity. Bolan Bank was acquired by AMB AMRO Bank, which was later on taken over by The Royal Bank of Scotland (RBS) due to global merger. Lately, it has been acquired and merged into Faysal Bank.

It is also necessary to mention the name of Summit Bank, created through acquisition and merger of three banks, namely Arif Habib Bank, Atlas Bank, and Mybank. This bank is headed by none other than Hussain Lawai, who not only managed merger and acquisition skillfully but also injected additional equity with the help of major stakeholders belonging to the Middle East.

Commencement of Islamic banking opened a new chapter in the history of commercial banks in Pakistan. Meezan Bank enjoys the distinction of being the first and the largest Islamic bank of the country. Others players include Bankislami and Burj Bank (formerly Dawood Islamic Bank). Some Middle Eastern banks have also established their operations in Pakistan and names include Albaraka and Dubai Islamic Bank. Emirates Global has been acquired by Albaraka.

Almost all the conventional banks have established designated Islamic banking branches to get a bigger share in the fast growing pie. At present, Islamic banks control around seven per cent of total banking assets, a phenomenal growth when compared with other countries. Islamic banks in Malaysia had taken almost 30 years to achieve this landmark.

The credit for this phenomenal growth goes to the government and the State Bank of Pakistan (SBP) for allowing Islamic banks to run in parallel with the conventional banks and let the public make their own choice.

Another major factor contributing to the massive growth of Islamic banking is its classification as 'ethical banking'. This encourages even the non-Muslims to indulge in Islamic banking.

Following the policy of liberalization, deregulation and privatization has completely changed the banking landscape in the Pakistan.

Now over 80 per cent of banking assets are managed by the private sector. With the passage of time, the SBP has also increased minimum paid-up capital requirement for the commercial banks, implemented PASCAL-II and now getting ready to implement PASCAL-III.

Commercial banks have also ventured into asset management and insurance businesses by creating separate entities. The also plays a major role in Pakistan's equities market. Besides running asset management companies, they maintain huge investment portfolios.

Mohammad Ali Khoja, the then Managing Director of PICIC, gave the concept of 'financial super markets'. The development finance institution floated a commercial bank, an asset management company and an insurance company. Later on, PICIC Commercial Bank was acquired by Temasek of Singapore and is now operating as NIB Bank but PICIC asset management and PICIC insurance are still operating, though with the change in management.

Commercial banks with the support of insurance companies have been able to enhance lending to the farmers. Last year 97 per cent of the target could be achieved. There is a need to go for comprehensive crop insurance scheme.

The country also needs a couple of housing finance companies, which can offer long-term credit that too at very low interest rate. Developing robust housing companies is a must for the growth of construction industry. Organized low cost housing schemes are necessary for containing proliferation of katchi abadis.

The average spread earned by the banks in Pakistan is above 7.5 per cent, which is exceptionally high. Though many of the experts demand reduction in discount rate, little is talked about reducing the spread. Alternatively, 'Big Five' may be asked to lend one percent of their total deposits to SMEs, micro enterprises and women entrepreneurs at 2.5 per cent. This could be adopted under policy of inclusion.