Sep 26 - Oct 2, 20


MUNIR SALEEM: I have served MCB Bank for around 33 years. I started career as a probationary officer and reached to the level of SEVP. Held the position of group head commercial banking till July 2009. I joined KASB Bank in August 2009 as group executive commercial banking and presently working as acting president since 1st April 2011.

KASB Bank is currently evaluating state of the art solution to revamp its already launched internet and mobile banking initiatives to offer latest products to its customers, also enabling the bank to host branchless banking.

The bank is also in the process of implementing a comprehensive customer relationship management (CRM) solution to improve its customer service and support deposit mobilization. The bank is also in process of upgrading its ATM network.

The home remittance business has been significantly developed and KASB Bank is currently a leader in this area amongst the private banks. The bank has attracted a substantial amount in foreign exchange under PRI as home remittance is a consistent rising trend supported by reputable partner institutions and unparalleled service quality.

With the continued emphasis towards increasing both the deposit base and its asset mix, KASB bank recorded increase of Rs1.8 billion in the deposit base during the quarter. On the other hand, cost of deposit has decreased by 4.83 per cent when compared with corresponding quarter of 2010. The deposit mix has continued to improve and the ratio of CASA to total deposits is now 50 per cent compared to 45 per cent in corresponding period of 2010. In furtherance of our efforts, a major marketing campaign is being launched in print and electronic media, which will produce further positive results.


MUNIR SALEEM: It is found that economic benefits, financial position of banks, latest facilities, and interest on deposits, strong global image and reputation are the factors that are motivating customers towards conventional banks. Interest free loan, financial position of bank, Islamic teaching and Shariah, knowledge of Islam and religious environment are the factors that are motivating customers towards Islamic banks. Findings showed that the customers of the both banks are satisfied with the facilities that are provided by the both banks but customers of conventional banks are more satisfied than the customers of Islamic banks.

Conventional banking is based on pure financial model, in which banks mainly borrow from savers and lend to enterprises or individuals. Conventional banks also earn from the services they provide such as letter of credits in which they earn the profit based on services of intermediately party among importers and exporters of any said goods or services) etc. One drawback of conventional banking is that it prohibits from trading in the shareholding of the borrowing concern. Because of fractional reverse system, they produce derivative deposits which helps them multiply their low-cost resources. Conventional banking sector will grow faster in coming years.

Since late 2007, Pakistan faced a difficult macroeconomic environment, not as such due to the global crisis. But, confluence of factors which had been brewing for a while, particularly the gradual buildup of macroeconomic imbalances led the country to embark on a macroeconomic stabilization program in November 2008 with the support of the IMF SBA.

The Global Financial Crisis (GFC) had an indirect impact in Pakistan which became evident in 2009 and manifested itself in various forms in the real sector of the economy. However, as said earlier, the major challenges facing the domestic economy can only be partly attributed to the GFC. Indeed, there was a decline in exports due to recession in economies, of which Pakistan is a major trading partners, and there was pressure on capital flows where strained liquidity position in global financial markets impacted foreign portfolio investment.


MUNIR SALEEM: Today, the banking sector is playing pivotal role in the growth of the country's economy. In accordance with the State Bank of Pakistan Act, the banking system is a two-tier system including the SBP, commercial banks, specialized banks, development finance institutions (DFIs), microfinance banks and Islamic banks.

The SBP has granted licenses to the industrial and commercial bank of China (ICBC) and Sindh Bank in December 2010. The ICBC aims to exploit opportunities in trade and project finance generated by a growing number of Chinese companies working in Pakistan while Sindh Bank aims to promote agricultural development and small-scale businesses.

Besides, the commercial banks, eight microfinance banks and seven development finance institutions (DFIs) are operating in the banking industry of Pakistan. Due to closing down of a number of DFIs during the last decade, the government is currently reconsidering to set up either an infrastructure bank or infrastructure institution as this is requirement of the country.

The banks in Pakistan provide settlement and cash services to individuals and companies including correspondent banking. Banks also offer domestic and cross-border remittance services to the population. Furthermore, they provide depository services for the accounting and safekeeping of securities. During the last few years, banks have been paying great attention to the expansion of services rendered to households and the enhancement of their quality and efficiency. New forms and channels of making payments have also been introduced.

The financial landscape of the country, which was significantly altered in early 1970s, has been transformed through sector reforms initiated in the early 1990s into an efficient, sound, and strong banking system.

The reforms have resulted in an efficient and competitive financial system. In particular, the predominantly state-owned banking system has been transformed into one that is predominantly under the control of the private sector. The legislative framework and the SBP's supervisory capacity have been improved substantially. As a result, the financial sector is sounder and exhibits an increased resilience to shocks. Today, almost 80 percent of the banking assets are held by the private sector banks and the privatization of nationalized commercial banks has brought about a culture of professionalism and service orientation in place of bureaucracy and apathy.

Banking technology that was almost nonexistent in Pakistan until a few years ago has revolutionized the customer services and access online banking, internet banking, ATMs, mobile phone banking/ branchless banking and other modes of delivery have made it possible to provide convenience to the customers while reducing the transaction costs to the banks.

The credit cards, debit cards, smart cards etc. business has also expanded. The foreign exchange market that was highly regulated through a system of direct exchange controls over suppliers and users of foreign exchange has been liberalized and all purchases and sales take place through an active and vibrant inter-bank exchange market. All restrictions have been removed with full current account convertibility and partial capital account convertibility.

Since 1st July 2008 real-time gross settlement (RTGS) payment system has been put in place. The RTGS has been named as Pakistan Real-time Inter-bank Settlement Mechanism (PRISM). Using this system, the banks holding accounts at SBP are able to operate their accounts in real time from their own premises via computerized network between SBP and the participating banks. Prior to the recent financial crisis, the excess liquidity and competition among the banks prompted them to move away from the traditional limited product range of credit to the government and the public sector enterprises, trade financing, big name corporate loans, and credit to multinationals to a never-expanding menu of products and services. The borrower base of the banks expanded manifolds as the banks diversified into agriculture, SMEs, consumer financing, mortgages, etc. The middle class that could not afford to buy cars or houses/apartments as they did not have the financial strength for cash purchases had been the biggest beneficiaries of these new products and services.


MUNIR SALEEM: Competition among the banks has forced them to move away from the traditional limited product range of credit to the government and the public sector enterprises, trade financing, big name corporate loans, and credit to multinationals to an ever-expanding menu of products and services. Along with strong regulation, supervision and enforcement capacity of the State Bank of Pakistan a number of measures have been taken to put best corporate governance practices in the banking system. 'Fit and proper' criteria have been prescribed for the chief executives, members of the boards of directors, and top management positions. Accounting and audit standards have been brought to the international accounting standards (IAS) and the international audit codes. External audit firms are rated according to their performance and track record and those falling short of the acceptable standards are debarred from auditing the banks.

Pakistan followed a "cautious liberalization" strategy. The current account transactions were made convertible but the controls on capital controls remained intact. Only foreign direct investment inflows into certain sectors of the economy were encouraged while portfolio investment flows were regulated. Residents were not able to convert their domestic savings into foreign currencies and businesses were allowed to invest abroad under tightly restricted conditions. Exotic foreign currency denominated securities and derivative products were not allowed.

The capital adequacy ratios were enhanced beyond the prescribed level of Basle I and financially engineered products having the potential of value erosion were not permitted. Variable capital ratios were introduced to reward the sound and efficient banks and penalize the weak and inefficient banks on the basis of objective indicators determined by the central bank.

Incentive structure for branch expansion and new business product offerings were linked to the performance of each bank. This in-built transparent mechanism held back the weaker or relatively unsound banks from mobilizing retail deposits. This mechanism was applied across-the-board and if the big banks failed to meet the soundness criteria they met the same fate. Thus the bias towards "Too big to fail" was indirectly contained in this manner.

The Central Bank invested in developing its own capacity as a regulator, watchdog, supervisor and monitor of a largely private sector owned banking system. The natural tendency of the private owners and managers to maximize their profits and bonuses by taking excessive risks with the depositors' money had to be kept under control. The SBP took effective enforcement actions shunning all political interference that resulted in cancellation of licenses, removal of top managers, superseding of the board of directors, and forced change in the ownership of the banks.


MUNIR SALEEM: It was felt and agreed between the government and the state bank of Pakistan that major deep-rooted reforms had to be undertaken as cosmetic changes have not achieved anything tangible. As a regulator and supervisor as well as adviser to the government, the SBP carried out diagnostic studies, prioritized the constraints facing the banking sector, designed the reform strategy and action plan, sought the assistance of the government in making legal and policy changes and international financial institutions for technical and financial resources, monitored the progress and ensured implementation of policy, regulatory and institutional changes required to move the process forward.


MUNIR SALEEM: While the banking sector in Pakistan is widely acknowledged for its rapid progress in recent years, debates still abound about the concentration of business and the associated impact on efficiency and the evolving market structure of the industry, especially since competition is an important dimension of efficiency. This is of particular relevance at a time when the industry has undergone a structural transformation due to consolidation in the last few years, a process which is expected to continue in view of the recent announcement by the central bank which aims to increase the minimum capital requirement. Consequently, the emergence of organizations which are "too big to fail" and the significant role of large foreign banks and their subsidiaries raises concerns regarding the degree of market contestability in the industry.

The banking sector in Pakistan is generally characterized by the dominant position of the five large banks. The share of these five banks in the overall assets of the banking system was 84.0 percent at the end of 1990: a year in which broad-based financial sector reforms in Pakistan were initiated, which included liberal licensing of banks in the private sector. Since then, the structure of the banking sector has evolved substantially.

These developments paved the way for an implicit moratorium on the issuance of new commercial banking licenses in 1995. This measure, along with the implementation of risk-based regulatory capital requirements in 1997 and subsequent increases in the minimum paid-up capital requirement (net of losses) set the stage for mergers and acquisition in the financial sector, especially within the banking sector.

SBP also facilitated this process of consolidation as the regulator and supervisor of the banking sector. Suffice to say that while traditional measures of concentration show a decline, these results need to be qualified on the basis of the outreach of the big five banks in rural vs. urban areas. These banks have a virtual monopoly in the rural areas due to their large branch network and economies of scale acquired over the years. Although other banks have started to operate in rural areas, primarily in compliance with regulatory requirements, it will take sometime for them to reach the level of operating efficiencies, and similar dynamics of competition, that the big banks enjoy.


MUNIR SALEEM: The close partnership between the private and public sector is essential to build confidence. In this respect, it is recommended that a forum be established where the private and public sectors could sit together to discuss Investment opportunities in banking sector. The forum must be composed of the prime minister, all the presidents of the national chambers, top businessmen/industrialists, top bankers, and relevant ministries' secretaries and ministers. The forum may meet regularly to review the economic situation of the country. The problem faced by the business community can be discussed and decisions could be taken immediately. This kind of partnership between the government and private sector will help restore market confidence.

The availability of better quality and more reliable services in all areas of infrastructure are key ingredients of a business environment conducive to new investment. In most infrastructure services, Pakistan is highly deficient as compared with many developing countries that have attracted higher levels of investment. In order to attract more investment in the banking sector the following barriers need to be removed:

Law and Order: An inadequate law and order situation keeps prospective investors on the sidelines. We need to stabilize the law and order situation.

Political Stability: Lack of political stability remains an important feature of Pakistan's politics since last two decades. Such frequent changes in government along with immediate changes in policies are hardly cordial for investors.

Economic Strength: In countries of high economic strength, the investor is assured of increased opportunities for business, as more government development projects and private sector investments put purchasing power in the hands of the people. Increased purchasing power means increased positive multiplier effects on the economy and a source for stability. Macroeconomic indicators show that Pakistan is loosing its macroeconomic strength, which is likely to adversely affect investment.

Local Business Environment: This covers many factors, including the availability of local lawyers, secretarial services, accountants, architects and building contractors, local consultants, ancillary and supporting industries, their quality, and their cost. It also includes the availability of suitable joint venture partners. All these conditions are not satisfactory in Pakistan.

Transparency of Regulatory System: Starting from a position of extreme over-regulation, the trend has been a gradual decrease of governmental obstruction of private business. Many regulatory changes, however, have not yet been politically possible to be implemented.

Infrastructure: The availability, reliability, and cost of infrastructure facilities (power, telecommunications, and water supplies) are important ingredients for a business environment conducive to investment. Pakistan compares unfavorably in infrastructure facilities with other developing countries that have attracted higher levels of foreign investment.