INTERVIEW WITH NAIM FAROOQUI, CHIEF OPERATING OFFICER SINDH BANK LIMITED

KHALIL AHMED
(feedback@pgeconomist.com)
Aug 15 - 21, 2011

PAGE: TELL US SOMETHING ABOUT YOURSELF?

NAIM FAROOQUI: Upon completion of my schooling from Karachi Grammar School in December 1973, I proceeded to United States for higher studies. I obtained a Bachelor's degree in industrial engineering from University of Houston, Texas in 1978 and subsequently did my MBA from Texas Southern University in 1983.

While studying for MBA, I also worked as an engineer at B.J. Hughes, oil drilling equipment manufacturing company. After obtaining my MBA degree, I decided to relocate to Pakistan in 1983 where I changed my profession from an engineer to that of a banker. It was then that I joined National Development Finance Corporation (NDFC), a development financial institution (DFI) which needed MBAs with engineering degree. My engineering expertise helped immensely, particularly in cost estimation of projects and subsequent determination of the project feasibility.

At NDFC, I initially worked in project finance division and then in the merchant banking division (MBD), more commonly known as investment banking.

At MBD, I was in charge of managing an equity portfolio of over Rs2 billion which included NDFC's investment in its subsidiaries/affiliates such as RDFC, NDLC, FCDC, BRR Modaraba, etc. besides being responsible for fee based activities relating to investment banking.

After having served NDFC for about 10 years, I joined Asian Finance and Investment Corporation Ltd (AFIC), an affiliate of the Asian Development Bank in 1992 where my last assignment was as Managing Director (Operations).

My responsibilities included managing staff who were assigned to invest and lend to private sector commercial entities in the Asia Pacific region, including Pakistan. A major portion of my function was dedicated to the assessment of proposals relating to investment in funds, infrastructure projects, commercial and investment banks.

I left AFIC to join ORIX Investment Bank Pakistan Ltd (OIBP) in 1998 where I was already serving as a nominee director of AFIC since 1996.

AFIC had taken a 7.5 per cent equity stake in OIBP along with ORIX Corporation, Japan, ORIX Leasing Pakistan (OLP) and other major financial institutions in Pakistan. OIBP was an active player in the capital market and earned substantial fee from mergers and acquisitions, syndication, underwriting and other related advisory services.

Following a move to merge OIBP with OLP in 2009, I moved to Pak-Kuwait Investment Company as its head of compliance and with the launching of Sindh Bank Limited in 2010, I was appointed its chief operating officer in December 2010

PAGE: WHAT ARE YOUR COMMENTS ON THE PROGRESS OF BANKING SECTOR SINCE THE INDEPENDENCE OF PAKISTAN?

NAIM FAROOQUI: Pakistanís banking sector has developed rapidly however still lags behind regional peers in terms of sophistication of products, deposit base and outreach to rural areas. Growth of the other financial sub sectors has also remained below their potential particularly in the non-banking financial companies and asset management companies. Although deposit penetration has increased, large segments of the economy still remain underserved by the formal financial system. There is a need to extend the reach of the financial system and better serve small entrepreneurs and households, especially in the SME, agriculture, and service sectors, which account for a sizeable portion of the country's GDP and employment generation but presently receive a relatively small share of advances.

Pakistanís banking sector has completed full circle from privately owned banks to state-owned banks and back to today's private-sector banks dominating the landscape. The privatization process has made it more dynamic and competitive but currently the banking sector is undergoing a phase of consolidation as smaller banks are struggling to meet capital requirements required by the SBP.

As a result, M&A activity is expected to remain in the sector. Despite the challenges faced by the banking sector, it remained resilient during the recent financial crisis affecting banks in the developed world and around the globe.

PAGE: WHAT MUST BE DONE TO PROMOTE E-BANKING ACTIVITIES IN PAKISTAN?

NAIM FAROOQUI: One factor hindering the growth of e-banking is low level of penetration due to lack of usage of banking facilities. This in turn is attributed to illiteracy and lack of computer know-how. Efforts have to be made to increase the number of on-line branches and expand new products by expediting branchless banking in the country. Branchless banking may be defined as the delivery of financial services outside the conventional bank branches using communications and information technologies and non-banking retail agents.

Sindh Bank, in a modest way, has initiated certain facilities for the accountholders, which would eventually convert into branchless banking for them.

During the past few years, asset quality has remained a key concern of Pakistani banks, and is evident from risk aversion displayed by the banks. At present, fresh private sector credit has virtually come to a halt as banks prefer to place funds in risk-free government securities with stable yields as compared to lending to private sector. Going forward, more accurate screening of borrowers and stronger prudential regulations are needed to ensure asset quality.

In addition faster foreclosure system is needed to improve banking sector's confidence in recovery of bad debts which remain un-recovered due to slow legal process.

This is a very important aspect as SME is considered the main engine of growth for any, particularly the developing economies. The SME sector in Pakistan is known to rely on low and obsolete technology and they lack technical skills needed for producing quality products. However, there is a misperception that SMEs are bad borrowers as their default rate is over 25 per cent. This may be true but one needs to go into the background of such loans and determine real causes of delays/defaults. Loans to SMEs, in my opinion, has a higher multiplier effect than through advances to large companies in terms of employment generation, GDP contribution, etc.

To cater to the needs of SME sector it is essential to

1. Bring in more innovation and competition with new products by setting up training centers.

2. Effectively channeling resources into SME through banking and non-banking companies.

The SBP must ensure that banks extend credit to this sector and regulations should govern banks to meet their yearend targets for credit disbursement to SMEs and making the banking sector more responsive to the needs of the economy and thus help achieve a more rapid and sustainable economic growth.

PAGE: YOUR VIEWS ABOUT ECONOMIC GROWTH?

NAIM FAROOQUI: We project real GDP growth to bounce back to four per cent close to the government target of 4.2 per cent. In FY11, however economic growth lagged targets in all three major sectors due to flashfloods. Agri sector got a blow from cotton and rice crop mishap, while industry growth was limited by energy shortages, along with crowding out of private sector credit. While low investment-low GDP merits attention for a sustainable recovery, we believe a rebound in real GDP growth looms, led mainly by agri growth in FY12.

However, agri growth (4.5 per cent in FY12E vs. target of 3.4 per cent) is expected to outpace manufacturing sector growth. Improvement in yield/acre and increase in sowing area of cotton are expected to be main drivers of real agricultural growth in FY12.

PAGE: WHAT ARE YOUR VIEWS ON THE CONTRIBUTION OF THE BANKING SECTOR IN PROMOTING INDUSTRIAL ACTIVITY DURING THE LAST 64 YEARS?

NAIM FAROOQUI: I personally feel that in this regard the DFIs within the banking sector have contributed significantly in promoting industrial activity in the country since inception. Initially, PICIC, IDBP and subsequently NDFC, BEL and the joint venture investment companies have contributed in setting up major industrial projects. It's a pity that the DFIs are now shying away from funding industrial projects as in the past, perhaps due to the fear of taking exposure in green field projects. I do understand the apprehensions of banks where unknown sponsors undertake a new project - however even where projects are promoted by experienced sponsors a certain degree of reluctance is being exhibited by the mainstream private banks.

On the brighter side with increased regulation and transparency now coming I do foresee an enhanced role for the banks in creating industrial activity by not just providing working capital finance but also long term project financing.