Banking Review 2013

Banking
Review2013
Monday, March 10, 2014 | www.brecorder.com/br2013
Contents
BANKING REVIEW 2013 | March 10, 2014
BR
RESEARCH
THE TEAM
Ali Khizar Aslam

Head of Research
Sohaib Jamali
Editor Research
Zuhair Lalani
Abbasi
Zuhair
Abbasi
Rabia
Research
Senior
Analyst
Research
AnalystAnalyst
Sijal FawadHaider
Hammad
Research
AnalystAnalyst
Senior
Research
Sidra Farrukh
Research Analyst
Javeria Ansar
Research Analyst
Sobia Muhammad
Saleem
Research Analyst
Adil Mansoor
Research Analyst
FROM THE EDITORS DESK

PAGE 4
BANKING BLUES
Ali Khizar Aslam
PAGE 5
PRIVATE SECTOR NO PRIMARY
LEVER OF GROWTH
Salim Raza
PAGE 7
LOAN DEMAND LOOKS
ENCOURAGING
Atif Bajwa
Chief Executive Officer, Bank Alfalah
PAGE 8
THE RISE AND FALL OF
BANKING SPREADS
Sobia Saleem
PAGE 10
SUMMITS PLANS TO
TURN ISLAMIC
Husain Lawai
President & Chief Executive Officer,
Summit Bank
PAGE 12
HOW BASEL-III WILL IMPACT
PAKISTAN, OTHERS
Sayem Ali
PAGE 14
HABIB METRO EYES
GROWTH IN TRADE FINANCE
Sirajuddin Aziz
President and Chief Executive Officer,
Habib Metropolitan Bank
PAGE 15
VIEW FROM THE STOCK MARKET
Rabia Lalani
PAGE 16
Rabia Lalani
BANKING:
AN UNCONVENTIONAL VIEW
Syed Bakhtiyar Kazmi
PAGE 17
Naseem Waheed
SAVING MORTGAGE FINANCE

Sidra Farrukh
PAGE 18
Research Analyst
BANKING AT A GLANCE
PAGE 20
Murtaza Khaliq
Creative Head
MEEZAN BANK CEO ANTICIPATES

A LARGER SHARE OF PIE
Irfan Siddiqui
Founding President and
Chief Executive Officer,
Meezan Bank Ltd.
PAGE 23
MONEY THAT PRAYS

Ahmed Khizer Khan
Burj Bank
PAGE 24
BRANCHLESS BANKING SECTION
PAGE 25
IMPROVING MOBILE BANKING
GROWTH PROSPECTS
Qasif Shahid and Shamsulhaq Niaz
PAGE 28
BARCLAYS:
STRATEGY BY DESIGN
Shazad Dada
Barclays Bank
PAGE 30
CITIBANK N.A. CAUTIOUSLY
OPTIMISTIC ABOUT PAKISTAN
Nadeem Lodhi
Country Manager and
Managing Director,
Citibank N.A.
PAGE 31
AGRI LENDING
Javeria Ansar
PAGE 32
MAPPING THE DISPARITY IN
BANK BRANCH NETWORK
ACROSS PAKISTAN
PAGE 34
BANK OF PUNJAB:
EYEING THE UNBANKED
Naeemuddin Khan
President and
Bank of Punjab
PAGE 35
SINDH BANK NO LONGER
PROVINCIAL IN CHARACTER
Bilal Sheikh
President and
Sindh Bank
PAGE 36
IMPEDIMENTS TO BUILDING
A STRONGER BOND MARKET
Abdul Rehman Warraich
PAGE 37
Editors note
Banking is always important
04 / Banking Review 2013
The publication of Business Recorders

Banking Review 2013 has interestingly
coincided with the release of State Bank
of Pakistans latest quarterly review of the
countrys economy that covers the period
July-September 2013. A fresh central
bank outlook, therefore, has thrown up an
opportunity for us to make a brief
comment on the banking sector in a more
cogent and meaningful manner. While
defending its decision of a hike policy in
rate by 50 basis points to 9.5 percent in
September 2013, SBP has argued that
policy tightening had become imperative
although monetary growth was already
subdued as the growth in broad money
supply (M2) during Q1-FY14 was only 0.2
percent, compared to 0.7 percent in the
corresponding quarter last year. [T]his
trend can primarily be traced to a rise in
the external deficit, which reduced the
NFA of the banking system by 64.4
percent during the period, according to
SBP. The SBP report, through a footnote,
explains that in absolute terms, the NFA
of the banking system declined by Rs
173.2 billion in Q1-FY14, compared to an
increase of Rs 11.8 billion in Q1-FY13.
Explaining why NDA, on the other hand,
posted an increase of 2.3 percent during
the quarter, the central bank holds high
budgetary borrowing from the banking
system and lower net retirement of
private sector credit responsible for the
rise. Through another footnote or an
additional piece of information printed at
the bottom of the page, the bank argues
why its decisions on interest rates are not
based on the previous data, but on the
forecast of macroeconomic variables. The
SBP report, indeed, gives one a bigger
picture of the countrys financial domain.
Having said that, one however needs to
admit the fact that a lot of water has flown
under the bridges since September 2013
and the present shape of macroeconomic
indicators amply explain why central bank
policies are sometimes not truly forwardlooking or perhaps, do not genuinely
provide for the future.
since 2000. However, there exists a

flawed, albeit widely popular, argument
that well developed financial markets are
correlated with economic development
and that a sound and sophisticated
financial system promotes the efficiency
of investment and economic growth in
an economy by reducing the costs of
intermediation and by improving the
allocation of risk. Unfortunately,
however, in our country well-developed
financial markets are conspicuous by
their absence; nor do we witness any
robust investment and economic growth
any more. This argument, therefore,
leads to a profound question whether or
not the key regulator, i.e., State Bank of
Pakistan, has been efficiently monitoring
the functioning of the domestic market
with a view to evaluating its impact on
the economy. A readily available answer
could be that the central bank has been
performing its regulatory job towards
money market, the forex market as well
as the domestic financial market in an
efficient way. But this does not appear to
be the most plausible answer because
what people generally confront is a
reality that shows that the banking
sector has been demonstrating an
impressive performance but the
countrys economy has been witnessing
a sluggish growth particularly since
2007. The other question that keeps
gnawing ones mind is that why the
banking sector has failed to effect in
recent years a generous distribution of
credit to support SMEs and regions with
a view to contributing towards efforts
aimed at broadening and building a
sound economic base. These two
profound questions have been
discerned from the write-ups in this
Review. The articles and interviews in
this publication address a number of
questions and issues relating to economics and finance such as finance, growth
and national integration; the rise and fall
of banking spreads; mortgage finance;
and an unconventional view on banking.
That our active financial institutions

deliver significant and unique value to
the countrys economy and businesses,
investors, and savers is a fact that has
found its best expression in the performance of our banking sector particularly
Last but not least, branchless banking

and Islamic banking seem to be the
buzzwords in the world of finance in
Pakistan. According to many, these may
be more of a solution than buzzwords.
Insofar as Islamic banking is concerned,
that has shown an impressive 10 percent

growth in a decade, this mode of
banking has become an important
segment of the global financial markets.
In Pakistan, we are witnessing the
operations of Islamic banking alongside
the conventional banking system.
Islamic banks have been anticipating a
bigger share of the pie and space in
coming months and years. They mainly
derive their confidence from Shariahcompliant products that they offer to a
largely conservative Muslim society. The
other major reason behind their growing
optimism is the fact that already Islamic
financial institutions, in one form or
another, are operating in over 70
countries. Its huge success in Malaysia,
for example, is a strong case in point.
But what the proponents of Islamic
finance often overlook is the fact that
Islamic economics, as argued, for
example, by Muhammad Akram Khan in
his book What is Wrong with Islamic
Economics? Analyzing the Present State
and Future Agenda, has failed in part
because of its disproportionate focus on
issues of financeboth in terms of
providing Islamic financial products and
institutions to circumvent the perceived
prohibition of riba, and in terms of zakah
as a tool of public finance. Those who
strongly advocate Islamic banking as a
substitute for conventional banking are
required to make unstinted efforts
towards making Islamic finance a
coherent discipline and chart a way
forward for that discipline in the
countrys economic policymaking. In the
end, this newspaper wishes proponents
of both conventional banking and
Islamic banking a bright present and a
brighter future. Business Recorder will
always encourage a healthy competition
between these two modes of banking in
the larger interest of Pakistan, although
one must refrain from making a direct
comparison between Islamic banking
and conventional banking.
Banking blues
Ali Khizar
The good thing is that the SBP is cognizant of the

need to develop housing nance as it not only
caters to the need of millions of households and
will also boost tens of allied industries by creating
economic activities and generating employment.
Ever since the global nancial crisis of 2008

dawned upon us, Pakistans banking industry
seemed stuck in a limbo. Although the countrys
nancial industry wasnt big enough to be affected
by the global meltdown, the growing twin decits
(scal and external) at home threw up an
opportunity for banks to narrow down the choice
of banking assets to government borrowing.
With the wiping out of some of the credit
extended to big ticket corporates and a virtual
demise of consumer lending in its nascent
stage, banks successfully ventured into
branchless banking and mobile banking in
collaboration with telecommunication giants.
However, the shocks of high toxic assets,
especially in SMEs and consumer sector, were
too much to be absorbed by technologically
advanced ways of banking.
To ensure steady prots, banks were forced to
become efcient by both reducing the markup and
administrative costs. However, in the process they
lost the prime focus of nancial intermediation.
The industry-wide advance-to-deposit ratio
(ADR) decreased from a peak of 75 percent in
December 2008 to less than 50 percent by
September 2013. The obvious reason behind
this decline was the governments nancing
needs that crowded out private credit as
investment-to-deposits ratio (IDR) (primarily
due to T-Bills) soared from 34 percent to 52
percent in the past ve years.
Considering that deposits base almost doubled
since 2007, the swings in ADR and IDR are tell-tale
signs on their own; though real economic growth
remained subdued in the period. Growth in
deposits appears impressive as it paced with a
nominal GDP growth in a high inationary era,
which is also attributed to over-reliance of scal
borrowing on banking system.
The governments borrowing stock from the
central bank increased almost six fold - from
Rs476 billion as of June 2008 to Rs2.77 trillion as of January 2014. This increase of Rs2.3 trillion
explains a two-third increase in bank deposits.
Effectively, had it not been for such a huge
increase in federal government borrowings, the
protability of commercial banks would have
stagnated in the last ve years. From Rs73 billion
in CY07, commercial banks prots nose-dived
to Rs43 billion in CY08 before hitting Rs178
billion in CY12.
Despite these decent prots, bank penetration continues to remain low as less than 15
percent of people have bank deposits accounts
and those who have access to credit are even
smaller in number.
Even among those who have bank accounts,
there are many who have no incentive to
maintain their accounts as such. A majority of
bank account holders are getting abysmally low
return on their savings and the worrisome fact is
that the trend has worsened over the past ve
years. The composition of CASA (current
account and saving account) increased from 58

percent in CY08 to 65 percent as of September
2013. Thats how banks maintained their high
spreads despite assets being skewed towards
low risk and low return government papers.
Higher spreads may have gotten bankers
good prots, but the approach has long term
repercussions for bankers as well as consumers.
The former are going to face an asset-liability
mismatch, once the scal house is in order and
the government has no dire need of nancing
from the banking system. On the ipside, the
latter is restricted from long-term nancing and
simultaneously depositor is not getting
adequate return on its savings. That partially
explains the fall of investment to GDP from 19
percent in FY07 to 14 percent in FY13 and
domestic savings to GDP from 12 percent to 8.7
percent in the past six years.
Recognizing these pitfalls, the central bank
had been pushing the banks to focus on
long-term deposits and to increase the return
on demand deposits (saving accounts).
First the SBP tried moral suasion. That, of
course, didnt work. Then it xed the minimum
deposit rate 5 percent, regardless of the fact
policy rate reached as high as 15 percent. But
commercial banks remained xated with cost
efciencies by increasing CASA, to which the
bonuses of liability managers were pegged.
Later the SBP increased the minimum rate on
saving accounts from 5 to 6 percent in 2007 but
that was not enough as well. Finally, the central
bank put its foot down and linked the deposit
rates to the interest rates corridor.
The linking of deposit rate is likely to compel
commercial banks to look for riskier high return
assets to maintain spreads. However, much
more is needed to be done to kick off private
sector lending. The government has to gradually
move away from banking system to give room to
private sector. Concurrently, macroeconomic
conditions need to be improved to encourage
bankers to lend to private sector and to whet a
credit appetite among corporates and SMEs.
Following the change in political regime, the
temporary resolution of circular debt amid a
gradual decline in non-performing loans that
already began before PML-N took ofce,
condence has started to return to the credit
market and there is an ensuing uptick in private
credit off-take. However, its sustainability is
contingent upon the resolution of structural
impediments, such as reliance of scal nancing
on banks, energy woes and bleak law and order.
The good omen is that the government seems
focused on improving overall economic
conditions. It has aggressive plans on privatization and corporatization of public sector entities.
That not only promises to bring efciencies in the
system but also has the potential to slash scal
decit by a good margin.
Continued on next page
Continued from previous page

The government also appears committed to
resolving the energy woes by installing new
capacities in coal and constructing dams. This
does not only bode well for other manufacturing sectors but also provides a huge opportunity for banking system to indulge in long-term
nancing projects. Plus, Pakistani exporters,
especially those in the textile sector, can
generate high credit demand in the wake of
GSP+. To date textile and power sectors
demonstrate improvement in both economic
and credit growth.
In the backdrop of these improvements,
banks ought to sway away from the attitude of
lazy banking as gone are the days when banks
can generate low cost deposits without much
Governments borrowing stock

from the central bank
increase
Rs2.3
trillion
Rs476
billion
Rs2.77
trillion
as of June 2008
as of January 2014
efforts and heedlessly deploy them to

government papers.
It is true that not all banks are heavily skewed
towards governments scal nancing. A few
banks have concentrated in the non-core
businesses over the period, such as in trade
nance. Then, benetting from their presence
around the globe, a few foreign banks have
specialized in dealing with multinational clients.
Then of course there is the treasury desk which
has lately been the most important avenue
within the conventional banking domain. In fact,
bank treasurer in a few banks is deemed to be
more powerful than the president of the bank.
However, all these areas are not enough to ll
the vacuum that will likely be created once the
government loses its credit appetite. Banks
ought to explore consumer segments including
mortgage nancing and have to penetrate
SMEs; although its easier said than done as in
the pre-crisis days the banks that ventured into
these businesses suffered big losses and since
then the industry has taken a cautious
approach to these areas.
One of the reasons why banks are reluctant
to capture this segment is poor foreclosure and
repossession laws.
Be that as it may, the good thing is that the
SBP is cognizant of the need to develop
housing nance as it not only caters to the
need of millions of households, but will also
boost tens of allied industries by creating
economic activities and generating employment. Apart from the foreclosure problems,
asset-liability mismatch makes these products

too risky, as mortgage is usually a long-term
asset while deposit base has a low maturity.
This can be dealt with by creating mortgage
nance companies, with long term funding, to
extend credit through commercial banks to
end users for a tenor of as long as 25 years.
Similarly, the central bank needs to facilitate
tailor-made lending products to SMEs. This can
be done by giving banks the rst right on the
cash ows of these rms upon default and by
virtue of this banks can have the incentive to
facilitate small companies to make proper
nancial statements, budgeting and planning.
While the preceding measures can increase
credit penetration in society, there is also a
concurrent need to bring a large chunk of
unbanked population into the banking net as more
than 85 percent of population does not have a
bank account. Financial inclusion is amongst the
key objectives of the SBP and government, as it is
imperative for creating a saving culture.
A large chunk of population does not have
access to banking facilities or uses them
merely for checking accounts as they consider
conventional banking un-Islamic. To this end,
the most successful experiment has been the
introduction of Islamic banking.
Pakistans Islamic banking has grown to 10
percent of total banking size in a decade; it
shows an immense potential in an economy
where religious beliefs are deeply entrenched.
Mind you, in the post-crises world Islamic
banking is considered as a safe haven and the
size of Islamic banking has grown at a much

faster pace in Islamic countries such as
Malaysia, the UAE, and Saudi Arabia.
This is exactly why virtually all the big players
are aggressively entering into this market
segment. MCB is acquiring a majority stake in
Burj Bank to open an Islamic banking subsidiary; it plans to quadruple the acquired entitys
assets size to over Rs200 billion. Then Summit
Bank is transforming itself into an Islamic bank
in CY14. Similarly, Islamic windows of Bank
Alfalah, Standard Chartered and a few others
are widening aggressively.
While the gradual uptick in credit off-take,
the extension of branchless banking and
developments thereof may be seen as the
winds of change. The trend towards Islamic
banking with almost herd-like following may
well bring the biggest tectonic shift in the
history of countrys banking.
The writer is Head of

Research at Business
Recorder. He can be
reached at:
ali.khizar@br-mail.com
Private sector no primary

lever of growth
Salim Raza
While banking in most

emerging markets
started with large
metropolitan banks,
the state either
retained ownership of
the banking system, or
directed lending to
ensure that SMEs and
the regions were
adequately supported
The writer is a former governor

of State Bank of Pakistan.
If Pakistans economy continues to grow at the

pace it has in the last ve years, it will take the
country 80 long years to double its per capita
income. India, by comparison, will take 11 years,
Bangladesh, 14 years, and Sri Lanka, 12 years.
This begs the question as to what is the
prognosis for Pakistan recovering to the 7
percent GDP growth needed to match
Bangladeshs pace for doubling GDP.
Our weakened growth capacity today is owed
to the deepening of policy and market failures
over time. Without addressing these, improvements in the external business environment
such as remedying power shortages, and
stimulating regional trade cannot provide the
much needed growth dynamism.
investment in government securities). In value,

this comes to Rs800bn being transferred from
the smaller to the larger provinces.
Access to nance creates broad-based
growth. With general access constrained,
wealth creation in Pakistan has consolidated
around a small number of large business
houses, and in particular regions, mainly central
Punjab and Karachi. Inequality has grown
sharply, inimical alike to creating demand,
which is the other side of sustainable growth,
and to political stability.
Where we stand, until the states forfeited
role in institutionalizing growth is understood,
identied and powerfully vitalized, we will
continue to drift.
Policy and market failure
Focus on localized credit supply
The central policy failure is scal, i.e., the

persistence of a state devouring public debt to
survive owing to its distorted scal principles,
which ordain that only the little people pay
taxes the deeply embedded droit du
seigneur of our political culture. This can be
easily addressed, if the political will to challenge
powerful plutocratic interest exists.
Market failure lies in increasingly ineffective
economic governance. The states regulatory
institutions have been politically enveloped,
and development institutions, wound down. A
complacent belief persists that the primary
lever of growth will be the private sector. But
that belief has proved delusionary. Our LSM
and nancial services sectors have, in effect,
jettisoned any ambition to take up the
leadership role in development.
The investment-to-GDP ratio has declined
to 13 percent. Within this, LSM has declined the
fastest, in current terms from Rs350 billion to
Rs 198 billion or by 40 percent (or 60%, in
constant FY06 Rupees). The banking sector
while it has greatly improved efciency and
convenience - has not grown over the last
decade, relative to GDP: still stands around 33
percent. The private sector now takes only 48
percent (from 67% in FY06) of bank loans and
investments, with the government taking 52
percent. Crowding out is becoming as marked
as was under the government-owned banking
regime when a basic rationale for banks
privatization was that they would divert lending
to the private-sector.
Borrowing by the SMEs the largest national
employer is down to 6.5 percent of bank
credit, from 17 percent in FY06. And regional
participation in credit essential for political
stability that is catalytic to growth has
withered on the vine.
Loans by banks in Khyber Pakhtunkhwa have
slipped to 9 percent of their total deposits in KP,
down from 12 percent in FY06; in Baluchistan, to 7
percent from 9 percent; and the gure for AJK has
remained at around 4 percent. The comparable
gures for Sindh and Punjab are 66 percent and 51
percent respectively (the reciprocal represents
Elsewhere, over history, the state has played a

strong role in building the economic base
through distribution of credit to support SMEs
and regions. During their development stage,
from the mid 19th century onwards, banking
systems in Europe and the US were tied
structurally into this objective.
Thus, banking licenses in the US restricted
banks to operations within individual states,
and sometimes, to single towns. The objective
was to mobilise local savings for job-creation
and growth within the communities. State
governments fostered SMEs by requiring that
state awarded contracts ensure a minimum
component of inputs from the SME, usually
25-40 percent. Where suitable, states invested
in small businesses, and guaranteed their loans.
At the federal level, the Washington-based
Small Business Association was created to
facilitate legal and operational issues pertaining
to SMEs, and to provide nancial assistance by
guaranteeing part of their borrowings.
The German states (Landers) set up their
own banks, the Landesbanken that nanced
business and projects within the states, and are
the apex banks (the Sparkassens) regional
savings banks. Some 40 percent of Germanys
banking system falls within this structure even
today. Another strata of banks are the
cooperatives, spread across the country. The
original objective for all these institutions was
again redeployment of local savings within the
region. Regional banks were the funding
sources for Germanys famed Mittlestand,
mainly family owned businesses that are today
the backbone of German industry.
In todays leading emerging markets, the state
has played the distributional role in a different
way. While banking in most emerging markets
started with large metropolitan banks, the state
either retained ownership of the banking
system, or directed lending to ensure that SMEs
and the regions were adequately supported.
Where banks are dominantly governmentowned, as in China (90%) and India (70%), the
state banks operate along strictly-dened
priorities for lending. In countries such as Brazil
and Turkey, where more than 40% of the

commercial banking system is governmentowned, there are special government-owned
development banks, focusing on agriculture,
SME, and infrastructure nance.
Provinces must take the initiative

For Pakistan today, the fast-track route to
galvanizing SME lending, which in itself is
regionally distributed, would be if the
provincial-owned banks (BOP, BOK, Sindh
Bank) were re-chartered to work exclusively on
the SME sector within their domain the raison
dtre for provincial banks was regional
development, but all three provincial lenders
now mimic national business strategies of the
commercial banks.
With provincial banks dedicated to the SMEs,
SMEDA should be embedded into their
operations; cross-reference of experience and
information would make SMEDA a more
effective development organization. Legal,
bureaucratic and infrastructural impediments
faced by SMEs would be redressed faster by
provincial governments if remedial recommendations were ltered through the provincial
banks and SMEDA rather than put to
provincial governments directly by the myriad
small business associations.
Also, given the rapid job-creation that a
vibrantly growing SME segment brings, it is likely
that provincial governments will come to see
the provincial banks as important agencies for
their own political success, and ensure high
quality of professionalism and governance.
To support this momentum, the federal
government should set up a venture capital
fund, with the participation of major commercial banks, to invest in individual SMEs with
innovative business plans. The board should
have a dominantly private sector composition,
and appoint the CEO. Venture capital funding,
and strategic and technical oversight should
help develop successful transactions,
highlighting the entrepreneurial potential latent
in SMEs. This should provide the SMEs more
reliable access to funding from banks.
Progressively, the opportunity will develop for
IPOs via the creation of a stock-market window
for small companies, such as Alternative
Investment Market for smaller growing
businesses in the UK.
Finally, another valuable support would be if
government project contracts required the
lead contractor subcontract or procure a
percentage of the project value, a minimum of
25 percent from regional SMEs, as is the case in
the US, and elsewhere.
In short, the state needs to play a much
stronger role in stimulating the development of
the broad-base of the national economic
pyramid. Together, the initiatives suggested will
stimulate smaller businesses across the
regions, create new jobs, and hasten national
economic integration.
Loan demand looks

encouraging
Atif Bajwa

Bank Alfalah
BR Research: How do you see the new

governments performance so far and how
has it impacted overall confidence?
Atif Bajwa: We are optimistic about the
future. I believe that there is a plan, and,
hopefully, 2014 will move on a fast and
positive track.
The intention from the government is
right. On the power issue, we already see
improvements and I expect further
development in the near future. However,
I suspect that the bigger impact of
initiatives will take some time as supply
side bottlenecks have to be removed.
Businesses are willing to invest in capacity
and equipment modernisation.
The big concern in the short run,
though, is the balance-of-payments
situation. The government is looking to
raise sovereign bonds and trade finance
facilities, whilst also seeking support from
multilateral agencies. All of these efforts
will start bearing fruit hopefully in the first
half of this year.
BRR: Will these efforts and improvement in
business confidence help boost banking
sector income?
AB: As long as business confidence is
backed by improved economic fundamentals and stability in the foreign exchange
environment, it will be very good for the
economy. It is not necessary that banks will
make money off these developments in the
short term. However, in the medium to
longer term, stability and growth will lead
to profitable results.
BRR: Has demand started pouring in from
the textile sector surrounding the GSP
Plus scenario?
AB: The numbers for loan demand are
looking slightly more encouraging, but
these may need to be adjusted for
cyclicality of borrowing needs. Some
clients are beginning to talk about expansion. There is interest in power projects
and there are some enquiries about setting
up alternate biogas and coal plants. But
this will only translate into reality over the
next few quarters.
I wouldnt say that there is a lot of activity

at the moment. A key development has
been that the bigger textile companies
de-leveraged over the years, helping them
in a volatile environment. As a result, these
companies are doing well and their
balance sheets are strong, and they are
well positioned now to take advantage of
lending facilities offered by banks.
BRR: The lending to SMEs has largely
been to the medium ones, with smaller
ones often neglected. Do you see the
trend shifting?
AB: SME is a slightly tricky area. The
banking sectors exposure to SME has
indicated a tilt towards larger sized
enterprises. And that is only because a lot
of banks have had their fingers burnt in
SME lending in the past. Hence, it is only
fair that they will all be a little more
cautious.
However, at Bank Alfalah, we have
decided that we simply cannot ignore this
sector, despite the fact that it has led to
higher NPLs. That doesnt mean we will
blindly start pursuing avenues of lending
in the SME arena. The fact is that the SME
sector has suffered from a chronic lack of
capacity. Their own understanding of
business management seems inadequate.
The sector has suffered from persistent
power outages and a lack of access to
markets as well, since Pakistan has
become somewhat of a pariah. These are
genuine issues that cannot be easily
dismissed or neglected.
Banks will have to abandon formula
lending and develop a well thought-out
model for SME Bbanking. At Bank Alfalah,
we are already working on this and have
restructured our SME approach with the
help of IFCs advisory service.
We have developed a model that views
SME operations holistically, instead of
solely focusing on the lending part.
Everything from their cash flows to their
non-core operations will be thoroughly
explored and understood. We also intend
to help smaller businesses with their
capacity building by providing them
access to non-financial advisory services.
Seemingly small aspects are important,
such as how to manage accounts, how to

set up a basic supply chain, educating
them about requirements by banks, etc.
And a little handholding goes a long way
in improving compliance and performance
of smaller units. To this end, we are, in fact,
just launching an SME Toolkit in collaboration with IFC - this is an online portal which
provides value-added resources including
business advice, local and global best
practices, opportunities and challenges to
both existing and potential SMEs in the
country. Such resources will play an
important role in the long term, sustainable
development of the SME sector.
BRR: Do you have any new consumer
products in the offing?
AB: We are looking to introduce new
products whilst refining some of our
existing product portfolio, increasing our
range of credit cards, introducing corporate cards and better defining the tailored
segmentation of products available for
individual customers. We remain the
largest issuer and acquirer of credit cards
in the country and these initiatives should
augment our efforts to retain that ranking.
In addition to our mainstream financial
solutions, we have also added a host of
doorstep banking options including
branchless, mobile and internet banking,
and cash management to our suite.
One of the key areas of focus for us this
year is wealth management we are keen
to penetrate this domain but want to
ensure that we base it on a comprehensive
needs analysis of the market, so as to
provide bespoke solutions to this segment.
Not many banks have succeeded in
Pakistan with their priority banking model,
therefore, we want to take our time but try
and do it right.
BRR: How do you see CY14 in terms of
deposit growth?
AB: I wouldnt forecast a dramatic
improvement. The industry average in
deposit growth is 13-15 percent, and that is
mainly driven by money supply growth.
The only real question is how much of that
can be deployed in fresh lending. If you
look at lending growth, the industry

average has typically hovered between 8-9
percent. While our bank outstripped the
market last year by growing at 18 percent,
at an industry level, deposit growth will
stay ahead of lending. We are hoping to
build upon this momentum and keep up
with last years performance.
BRR: What is the major impediment your
Islamic banking window faces?
AB: We are the second largest Islamic
offering in the country. Our Islamic
deposits currently comprise 16 percent of
the banks total deposits.
From an industry perspective, Islamic
banking is still the fastest growing area in
banking. However, whilst deposits keep
growing, the issue is more on the assets
side. Islamic assets are very difficult to find,
as there are not enough Sukuks or other
such Islamic products. If you look at Islamic
banks, their ADR is closer to 35 percent on
average the key reason for this is that they
cannot find Sharia-compliant structured
assets. The government could help by
rolling out local and foreign currency
Shariah-compliant Sukuks.
BRR: Since youve been expanding with
such aggression, your cost-to-income
ratio is higher than your peers. How are
you going to manage the human resource
side of the expansion, whilst trying to
keep a lid on costs?
AB: Relative to the market, our staff-tobranch ratio is high as the size of our
branches is bigger; hence the cost of
maintaining a branch is higher.Our future
growth strategy is robust; we are currently
at 574 branches and plan to continue
expanding our footprint by redeploying
employees from our existing talent pool.
Hence if you look at our figures, while our
branches have gone up in number over the
last 2-3 years, the head count remains flat.
This also helps our efforts to provide our
staff with cross-functional job rotations and
opportunities in new roles within the bank.
Interview by Ali Khizar
The rise and fall of banking spreads

Sobia Saleem
One of the gravest problems nailed to Pakistans
banking system since the inception of nancial
liberalization reforms in early 1990s is the fact
that depositors are not paid an adequate return
on their savings.
The removal of the ceiling on lending rates in
March 1995, followed by the withdrawal of
SBPs instructions on payment of returns to
investors and depositors in June 1998, had a
profound impact on the interest rate structure
of the nancial sector.
In early 1980s, banks were advised to declare
prot rates on saving deposits after obtaining
clearance from the SBP on the proposed prot
rates. However, after the nancial liberalization,
banks were asked to determine the returns
payable on funds mobilized from investors and
depositors on the basis of the prots and losses
incurred by them, and the requirement to seek
approval from the SBP on proposed prot rates
was dispensed with.
While the linkage of lending and deposit rates
with the policy rate was a bona de move that
helped the objective of monetary transmission, it
also led to a gradual increase in banking spread.
The movement of weighted average lending
and deposit rates of the banking system over
the years gives an obvious impression that
while the lending rates moved quite in tandem
with the policy rate, charging adequate risk
premium over and above, deposit rates lagged
far behind. The widened gap between savings
and deposit rates, also known as net interest
rate spreads, that discouraged savings culture
in the country on one hand, proved to be the
engine of banking sectors robust nancial
performance in the recent years.
The fact that the banking sector didnt share
its fortunes with the depositors, who are the
major nancier to the banks, led to a depressed
pace of deposit mobilization. This is well evident
by the fact that deposits nosedived to less than
27 percent of GDP by FY13 compared to over 60
percent in India and around 52 percent in
Bangladesh. In contrast to deposits, the
currency-in-circulation in Pakistan is hovering
around 31 percent of the deposits.
Growing currency-in-circulation implies
depletion of deposits, and vice versa. SBP
Research Bulletin titled The Behavior and
Determinants of the Currency Deposit Ratio in
Pakistan reveals that a rise in currency-incirculation results in lesser deposits and hence
lesser loanable funds available with the banks.
Negative correlation between currency in circulation and deposit growth

Deposit (YoY Growth)
Currency in circulation (YoY Growth)
30%
25%
20%
15%
10%
5%
Jan -07
Jul -07
Jan -08
Jul -08
Jan -09
Jul -09
Jan -10
Jul -10
Jan -11
Jul -11
Jan -12
Jul -12
Jan -13
Jul -13
Source: BR Research calculations based on SBP data
This restricts banks ability to meet private

sector credit demand and in turn impairs
economic growth.
To put things in perspective, the banks had
focused on private-sector lending before the
crisis of 2008. Private sector lending was one of
the dominant contributors of the mushrooming
interest rate spreads. As of June 2008, the stock

of government securities was only 16.4 percent,
while lending to the private sector was 52.4
percent of their total assets.
Post 2008 nancial crisis, however, banks
were hit by huge levels of non-performing loans
(NPLs), following which they juggled around with
Trends in lending and deposit rates

Interest rate spread
Lending rate
Deposit rate
%
16
14
12
10
8
6
4
2
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
Source: BR Research calculations based on SBP data
Dec-11
Dec-12 Dec-13
their asset-mix and turned their gaze from risky

advances to low-yielding government securities
in the pursuit of cleaning their balance sheets
from the scars of nancial crisis.
The risk averse strategy assumed by the
banking sector had a propensity of dealing a
death blow to its bulging spreads. Besides, the
SBP also imposed the minimum deposit rate
(MDR) of 5 percent per annum on all categories
of saving/PLS deposits with effect from June
2008. But the banks tactfully diluted the
negative impact of balance sheet shift and MDR
on the spreads by playing with the other variable
of the equation deposits.
A breakup of total banking sector deposits
indicates that the share of xed deposits has
dropped from 35 percent in 2008 to 27
percent in June 2013. Conversely, current
accounts grew from 27 percent to 30 percent
of total deposits whereas saving deposits grew
from 37 percent to 41 percent of the total
deposits over the same period.
The change in deposit mix of the banking
sector lowered its maturity prole, creating
further incentive for the banks to park their
funds in government securities; the
governments domestic debt maturity averages
less than two years, which matches the
asset-liability maturity proles. In the process,
banks pace of deposit mobilization was also
hindered: average year-on-year growth in
deposits eased to 13 percent in the ve years

after the 2008 crisis, vis--vis an average growth
of 19 percent in the ve years before.
Besides, over the years the banking sector has
signicantly diversied its sources of income.
Non-markup income as a proportion of gross
banking income has grown signicantly in the
recent years, which also helps buttress their
bottomline. This created a win-win situation for
the banks whereby they kept NPLs at a bay by
ignoring the private sector credit yet sacricing
little on the earnings front.
Connecting the dots, the MDR imposed by the
central bank back in 2008 could neither trigger
banks to recompose their asset portfolios in
favor of private sector lending; nor did it
encourage savings culture as the banks started
mobilizing low cost, low maturity deposits.
Bear in mind that in 2008, the SBP was
determined to taper the spreads to boost the
savings culture and to compensate the
depositors well. However, in the current
backdrop, as banks are negligent of their core
duty, keeping a check on spreads could serve
the dual purpose of boosting deposits as well as
private sector credit off-take.
The monetary easing of 500 basis points
between FY12-FY13 coupled with the increase in
MDR from 5 percent to 6 percent in 2HFY12 and
change in the prot calculation methodology from
minimum monthly balance to average balance
appears to be a nail right in the head, as it
narrowed the spreads from 5.54 percent in FY12
to 4.86 percent in FY13, a level unseen since FY05.
While the banks were expecting the monetary

tightening to create a breathing space for their
spreads, the central bank adopted the principle
of the worse, the better. With the rate hike of
50 basis points in September 2013, the SBP did
not only raise the MDR to 6.5 percent, but it also
pegged it to SBP repo rate, leaving a margin of 50
basis points between MDR and SBP repo rate
(SBP repo rate is 250 basis points less than the
policy rate). With the second hike of 50 basis
points in November 2013, MDR clocks in at 7.5
percent with banking spreads hitting another
9-year low of 4.5 percent in December 2013.
The banks appear exing muscles to combat
the current level of spreads by mobilizing
current accounts and shunning saving deposits.
Private sector lending also showed notable
improvements during 1HFY14, which grew by
9.95 percent vis--vis a growth of 5.77 percent
during the similar period last year.
Some attribute this growth to be the
long-awaited revival in banks asset portfolios
while others attribute it to banks lackluster
participation in government securities auctions
in 1QFY14 because of uncertainty on the
discount rate front.
Whether or not the private sector credit growth
in 1HFY14 is the revival of banks appetite for risky
lending, one thing is for sure: if the risk free lending
avenue is unavailable or becomes unattractive to
the banks or is shared with a diversied investor
base other than banks, banks will denitely look for
avenues to park their surplus funds. Thats exactly
what happened in 1HFY14.
Deposit-to-GDP ratio
India
Bangladesh
Pakistan
%
70
60
50
40
30
20
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: BR Research, Federal ReserveBank of St. Louis
The listing of government securities on the

local bourses is also a positive development
on this front. The move would take time to
reap its desired results; but it would denitely
cause a dent on the banks asset portfolios by
sharing the pie of government securities with
retail investors.
The idea is that merely squeezing the banking
spreads to trigger private sector lending or to
instill a savings culture in the economy would
lead to nowhere. Banks are smart enough.
Sooner or later, they will play with other variables
of the spread equation and end up making
attractive prots.
The way to go forward is directed lending or
priority sector lending to boost availability of
credit to the private sector. A similar tool is
adopted by the Reserve Bank of India whereby all
public, private and foreign banks with 20 and

more branches have to lend 40 percent of their
adjusted net bank credit to six priority sectors
dened by the central bank. The same strategy is
also employed in different forms and shapes by
South Korea, Japan, China, Brazil, Thailand etc.
Still at the end of the day, twisting the banks
arms are structural issues such as power
shortages, security issues and above all banking
courts, which must be improved to turn the tables
and reap the true benets of shaved margins.
The writer works as

Research Analyst at
Business Recorder.
She can be reached at
sobia.mesiya@gmail.com
Summits plans to turn Islamic

Husain
Lawai
President and
Summit Bank
Husain Lawai is a seasoned banker who has worked both in Pakistan and the Middle East.
Currently, he is serving as the President and the CEO of Summit Bank. In this interview with
BR Research, Lawai talks about the banks plans to raise capital to meet its capital adequacy
requirements as well as its plans of conversion to Islamic bank.
Below is the edited transcript.
BR Research: Lets take it from the top.

Your equity is as low as Rs3.2 billion. How
do you plan to restore financial stability?
Husain Lawai: We have given a commitment to the central bank that we will be
capital compliant by September 2014. We
have already appointed a financial advisor
in Abu Dhabi. We have also informed the
arrangement to SBP that as a first step, we
are offering $50 million additional capital,
which will hopefully be raised by end of
March 2014.
with what is happening around the globe.

We should give the borrower a reasonable
time, say of 6 to 8 weeks, to submit
remedial plan for rehabilitation of the
project. The bank should give time, of say
11 months, to implement the rehabilitation
plan and monitor key performance criteria.
If the borrower fails in implementing its
plan, then the bank should take over and
dispose off the project or business. This
should all happen with the support of high
court or banking court.
BRR: Who is providing this amount?

HL: We are receiving it from 4-5 investors. An
in-principle commitment of $35 million has
been made from one investor based in Abu
Dhabi. One is from Bahrain, one is from
Kuwait, two are from Malaysia and one is from
Qatar. These are high net worth individuals.
Our sponsors will be funding $11.5 million and
if there is any shortfall in capital in September,
our sponsors will subscribe it. The expected
shortfall will be $10 million, which will be
injected by our sponsors.
BRR: Can we safely say that the worst is

over for Summit Bank?
HL: Yes. The last quarter of 2013 was the
turning point. We can assume that the
economy will also be doing better. I am
positive as long as the government goes
for structural reforms rather than going for
cosmetic measures.
BRR: When do expect the bank to start

posting profits?
HL: Over the next two to three quarters.
BRR: If we look at the classification of your
NPLs, most of the NPLs are in loss
category. Is it because of full provisions?
HL: Yes, for those NPLs no further
provision is required. But although certain
NPLs have been fully provided for, we
expect to book full reversals for it. We
expect more reversals in 2014.
BRR: What is the biggest stumbling block
in recovering bad loans?
HL: Unfortunately, in Pakistan the judicial
system favors the defaulter as opposed to
the lender. It takes as long as 15 years to
recover the amount as the defaulters want
to exhaust all the appeals and judicial
process. Such long delays in recovery of
defaulted amount are detrimental for the
banking sector.
BRR: What is your view on the corporate
rehabilitation act?
HL: I am in favor of the act, but not in its
present shape. We have already suggested
a number of changes.
The corporate system should be aligned
BRR: Do you think the linking of minimum

deposit rate with discount rate is a
positive development?
HL: In the long run, yes. In the short run,
however, some banks will feel a pinch.
BRR: Why are banks not penetrating into
the lower end of the market?
HL: It is because the cost of opening
branch has gotten very high. It costs
roughly Rs15 million; setting up an IT
system, installing and providing the branch
infrastructure, etc.
We are in conversation with the central
bank, to build something which is between
a booth and a branch with only a three
person staff. Using a satellite we can
provide services of paying utility bills,
collecting home remittance, etc, to our
customers in areas where there is no
branch. If they want to open an account
one person can assist over there and the
rest of the processing can be carried out
from the branch.
BRR: What kind of innovative lending
products are you thinking to launch?
HL: We plan to go for small tickets which
give better return. We have launched a
scheme called Sonay Pe Sohaga, where
we will allocate some funds to our consumers which will be guaranteed by the
companies they are employed in. They will
not be just plain vanilla consumer loans;
they will be pegged by corporate guarantees. We have already entered into

arrangements with leading corporate
companies. Apart from that we are
negotiating with prospective customers.
BRR: There is a lot of talk about Summits
full-fledged transition to Islamic banking.
What is the actual plan?
HL: In March 2013, our board of directors
announced that this transition from
conventional banking to Islamic banking
should be carried out in the next 5 years.
But now we are planning to do it in 3
years. This is because if we compare the
conventional and Islamic banking sectors,
Islamic seems to be growing at a faster
rate in Pakistan.
Moreover, our Chairman Mr. Naseer
Lootha was the pioneer of Islamic banking
in the world when they launched Dubai
Islamic Bank. Hence, from the time when
he took over Summit, he has been eager to
pursue Islamic banking. The merger of
three banks was a good learning experience for us and in the next three years, we
look forward to operate as an Islamic bank.
BRR: What is the reason behind this shift
from conventional to Islamic banking?
HL: There are three reasons for this. One,
growth potential is significantly higher for
Islamic banks. The other reason is that if
we continue to function as a conventional
bank we will not be able to sustain as a
major player in the sub-sector of the
banking sector. On the flipside, if we shift
to Islamic banking, we will be among the
top three. The third reason is that there is a
lot of gap in the Islamic banking market. In
my view Islamic banks in Pakistan are not
offering true Islamic products; they just
change the label.
BRR: Do you think your customers will
switch from conventional to Islamic banking?
HL: Actually, we conducted research
regarding this last year. Earlier we were of
the view that we should maintain conventional as well. After the survey, however,
we concluded that 95 percent of the
customers that include both depositors
and borrowers - were willing to switch to
Islamic banking. In addition we also look
forward to attracting new customers.
BRR: What kind of products do you plan to
offer as an Islamic bank and what will make

them stand out from other Islamic
products being offered by other banks?
HL: Our main thrust would be on two
products, Mudaraba and Musharaka. When
I was the president of MCB we introduced
Musharaka; we offered it to some textile
units and steel mills. This was carried out
after conducting extensive research on
these industries and the returns were
greater than the interests received earlier.
BRR: What is the structural plan for
conversion over the three years?
HL: We will be starting from March 7 this
year; we have already received the
approval from central bank to conduct
Islamic banking. We are starting from the
conversion of one branch, which is the one
on I.I. Chundrigar Road, Karachi. The
customers associated with this branch will
be informed about the changes. Of those
the ones who wish to continue with
Summit will be offered
Mudaraba,Musharaka and Ijarah later. The
process of converting branches will
continue, and we hope to achieve complete
transformation in the next three years.
BRR: How many new branches are you
going to open in 2014?
HL: We did not apply for branches in
October 2013, but we hope to take our
decision about it in March 2014. A
maximum number of 10 branches will be
opened during 2014. Instead we plan to
improve the performance of existing
network. At our national conference this
year we plan to address the area managers
and regional managers and discuss ways
to improve the productivity and efficiency
of each branch and each employee rather
than opening new branches. We will give
more attention to those branches that are
not doing well and then we might shift
them or take some other measures.
Interview by
Ali Khizar and Sobia Saleem
How Basel-III will impact

Pakistan, others
Sayem Ali
If banks are unable to

raise the equity
required under
Basel-III (and
necessitated by its
second-round
impacts and by
European bank
deleveraging), they
are likely to curtail
lending to
corporates, creating
a nancing gap.
The Basel-III regulations have come into effect

from January this year. These regulatory
changes are to ensure that history doesnt
repeat itself in the form of another 2008-like
nancial crisis. The changes to banking capital
requirements will have a wide-ranging impact
on bank lending practices and credit availability
to the private sector over the next ve years.
State Bank of Pakistans circular, issued on
August 15, highlights the Basel-III reforms
agenda and implementation timeline. The
major changes pertain to the raising Capital
Adequacy Ratio (CAR) to 12.5 percent in a
phased manner by end of 2019, up from 10
percent today under the Basel-II framework.
The additional capital requirement is part of
the Basel Committee on Banking Supervision's
recommendation to introduce an additional 2.5
percent Capital Conservation Buffer (CCB) on
the banks.
It is important to note that the SBP is
implementing the Basel-III capital ratios at 2
percent above the Basel Committee's
recommendations of 10.5 percent (8% of total
capital + 2.5% conservation buffer) to act as a
buffer for the additional capital that may be
required because of modelling shortfalls.
The Basel-III regime includes several
elements that will be phased in between 2013
and 2019: a capital conservation buffer (2.5%), a
countercyclical capital buffer (0-2.5%, depending on conditions), and a buffer for global
systemically important banks (1% for each).
Under the Basel-III regime, there are also
limitations that will be imposed on bank lending
in case CAR falls below the 12.5 percent
requirement. In particular, banks will need to
reduce lending against its CE (Common Equity)
Tier I of CAR. The changes in Basel-III are
expected to lead even well capitalized banks in
EU, US and emerging markets to nd it hard to
be compliant.
Pakistani banks are well capitalized with CAR
of 15.6 percent (September 2013), with Tier 1
capital making up over 13.4 percent. Hence,
even with Basel-III implementation most of the
banks will easily meet CAR requirements.
According to SBPs estimates, the CAR of banks
would drop to 14 percent under Basel-III
regulations still above the prescribed limits.
However, there will be some crowding out of
smaller banks, which will support mergers &
acquisitions in the nancial sector.
Within the emerging Asian markets, Indian
banks are likely to be more capital-constrained
than peers. The Reserve Bank of India estimated
in its annual report (August 2012) that Indian
banks face an equity shortfall of $35 billion on
account of Basel-III implementation. Banks in
China have the next-highest capital requirement
of $14.5 billion, largely driven by high nominal

GDP growth. US and European banks face an
uphill challenge and may be the most
signicantly impacted as a result of Basel-III.
In May 2012, Fitch Ratings published a study
on potential pressures on 29 Global Systemically Important Financial Institutions (G-SIFIs
the too big to fail banking giants) arising from
Basel-III. According to Fitch, the average G-SIFI
bank would have to raise $9.5 billion of
common equity to comply with Basel-III rules.
The aggregate amount for the 29 banks would
be a whopping $566 billion.
This shortfall would be met by a combination
of earnings retention, equity issuance and
reduction of risk weighted assets. Maintaining
higher capital levels over the longer term under
Basel-III is likely to lower banks Return on equity
(ROE) as they face higher capital costs.
According to a Fitch study, large banks globally
would see an average ROE decline of 20
percent as a result of Basel-III implementation.
Another study, conducted by McKinsey at
end-2010 for European banks, estimated the
ROE impact on European banks at 30 percent.
If banks are unable to raise the equity
required under Basel-III (and necessitated by
its second-round impacts and by European
bank deleveraging), they are likely to curtail
lending to corporates, creating a nancing gap.
Our estimates suggest an aggregate shortfall in
corporate lending from banks at over $340
billion over the next ve years.
In Pakistan, a combination of tighter lending
requirements and crowding out of private sector
credit are already driving corporates to raise
funds from debt & equity markets. As growth
picks up and credit demand grows stronger, one
can see signicant new TFC oated in the
markets over the next few years.
Pakistans corporate bond market is very small
at around an estimated Rs350 billion, which is
around 1.5 percent of GDP, and only a tenth in size
of the total government bond markets.
Traditionally, banks have been the primary
funding source for corporate in emerging Asian
markets. However, the composition of corporate funding is likely to change over the next
decade. While some of this expected shift will be
structural as the regions bond and alternative
funding markets develop, it is likely to be largely
driven by constraints on bank funding.
Basel-III and deleveraging by European
banks are likely to cause a structural shift in the
composition of corporate funding; prompting
more corporates (especially higher-rated
ones) to access bond markets directly rather
than borrow from banks. This is likely to
increase the size of the regions corporate bond
markets over the medium term.
The shift is already under way as big corporates

turn to the bond market for longer-term (and,
arguably, less covenant-heavy) funding. In 2011,
Pakistan saw two large corporate giants Engro
and KESC raised Rs4 billion and Rs2 billion
respectively through issues of Term Finance
Certicates in 2011. Standard Chartered
Pakistan successfully closed a ten-year Rs2.5
billion TFC, marking the largest offering in
Pakistan by any nancial institution in 2012.
The key question is that will there be enough
demand for all the corporate bonds likely to be
issued in Asia? In our view, while international
investment is likely to rise, a large part of the
incremental demand will come from local
investors. If Asian government bond markets
are any indicator, international investors own
less than 25 percent of the local-currency bond
markets, while domestic nancial institutions
own close to 60 percent. In Pakistan, the
foreign investment in government bonds is less
than 5 percent; nearly 95 percent is from
domestic investors led by banks.
Local currency bond markets in Asia are
currently fragmented and very local. If they
need to grow exponentially in the next decade
to ll the gap left by reduced bank lending,
greater cross-border mobility and
intra-regional fund ows will be required.
The local markets are at varying stages of
development. Some are still trying to establish
a sovereign yield curve, whereas others have
well-developed corporate bond markets as
deep as those in the US or Europe, with
corporates issuing bonds across the maturity
and rating spectrum.
The dominance of quasi-sovereign issuers and
nancial institutions is another concern. Issuance
from the private sector is still dominated by highly
rated corporates (AA and above on the local
scale), with access to BBB-negative and lower
rated issuers heavily restricted.
The strong role of the states in these economies is one reason for this; but it also reects the
early stage of development of corporate bond
markets and the risk-seeking behaviour of local
investors. Lower-credit quality borrowers need to
be able to access the bond markets in order to ll
the gap, much as in the larger and more vibrant US
high-yield bond markets.
The writer has worked as economist

Middle East, Pakistan, and North
Africa at Standard Chartered Bank.
His views do not necessarily represent
those of the organisation.
HabibMetro eyes
growth in trade finance
Sirajuddin Aziz
President and Chief Executive Officer, Habib Metropolitan Bank

Sirajuddin Aziz is currently associated with Habib Metropolitan Bank as its President & CEO. During his 35-year banking
career with international as well as local banks, he held several senior management positions in various countries
including Pakistan, the UK, the UAE, Nigeria, Hong Kong and China.
During his career, Aziz has contributed to various professional bodies including Pakistan Banks Association as Chairman.
He has been a regular speaker on credit, trade and foreign exchange at The Institute of Bankers Pakistan and other
prestigious institutions. Aziz also frequently contributes articles to newspapers on various subjects.
When it comes to the economy at large

Aziz minces no words in expressing his
concerns. Pakistans tax-to-GDP remains
one of the key economic variables in the
current economic environment, which
can be described as sluggish at best. He
adds that FBRs tax collection numbers
bear evidence of the rampant mindset of
not paying taxes, hoping that the current
government would augment revenue by
introducing tax reforms.
Linking the fiscal discipline with banking
sector, Aziz said that while banks are
doing well in terms of growth and
profitability, the risk free borrowing
environment has affected the strategy of
the overall sector. The presence of riskfree borrowers impacts the lending
spectrum and consequently the portfolio of advances; banks shy away from
extending credit to the relatively riskier
private sector alternate, he said.
Aziz is hopeful that with interest rates
back on an upward trajectory, banks can
be expected to post higher topline
growth. He expects the industry to
strategize towards core advances as
banks cannot sustain their books solely
on government securities.
Contrary to popular opinion, Aziz is of
the view that banks are now better poised
to revisit consumer financing. At the
moment, banks enjoy a competitive spirit
among them and are faced by a discerning customer base.
HabibMetro has stayed abreast of the
industry growth curve. The bank is
currently operating on the strategy of
organic growth and is penetrating new
locations with its presence. From 183
branches in 2012, out of which 100 were
in Karachi, HabibMetros branch network
has grown to 214 branches, spread across
49 cities, as of the end of 2013.
We are one of the leading trade finance

banks, which handles a significant share
of Pakistans total trade business. One of
the practices and strategies that has
enabled the bank to capture this evergrowing market share is transactional
integration, whereby we handle both legs
of the transaction, says Aziz. Trade
finance will continue to be the business
segment of interest for HabibMetro
according to Aziz, since in addition to its
viable self-liquidating nature it offers
derivative products which increase its
appeal versus other business segments.
Addressing the passive lending prevalent in the banking sector, Aziz said that
large banks enjoy the inherent advantage
of low cost deposits and can indulge in
this risk-averse practice. However, he
believes that lending opportunities will
widen with economic growth and development that is complemented by
improvement in law & order and resolution of energy issues.
However, he points out that resource
generation will prove to be challenging for
the banking sector, with the products
offered by different banks being more or
less the same. In this competitive environment, HabibMetros advanced technological platform provides a competitive
advantage by offering fast pace banking
solutions at the push of a button.
HabibMetro has been a trade finance
bank since its inception, and hence its credit
business is significantly greater compared
to other similar sized banks, said Aziz
before emphasizing the viability of trade for
any developed or developing country.
Being a trade finance bank, the lender
has had its share of NPLs emerging out of
the global financial crises of 2008,
onwards. Briefing about the NPLs, Aziz
explains that a close examination of the
entire banking sector NPLs would show

that most NPLs were a result of export
finance, where the buyer of Pakistani
goods, defaulted. However, Aziz maintains
that HabibMetros NPLs were on a decline
and in control.
On the subject of deposit mix, Aziz
believes that saving deposits are stickier
and in that respect cost efficient, which is
why they form a notable quantum of
HabibMetros deposit base. However, he
is not very enthusiastic about the decision
to peg deposit rates with the discount rate
and asks for it to be reviewed for the sake
of financial viability.
Commenting on the diversification in
HabibMetros exposure and composition
of advances; Aziz says that high concentration of credit exposure in the textile
sector earlier has now taken the form of
well diversified exposure across a number
of sectors.
He adds that due to expectations of
greater economic and business activity,
the trade-oriented banks lending and
hence ADR - is expected to witness an
increase against a trade-off with the IDR,
which is expected to decline. By December 2014 we can expect HabibMetros
ADR to mark at 55-58 percent, adds Aziz.
Praising the State Bank, Aziz said it is
the best regulator in the region. They
have been extremely proactive in regulating the market and have dealt with the
financial crisis of 2008 proficiently,
preventing the banking industry from
being aggressive. The regulators mechanism of inspection, which was
transaction-oriented earlier, has also
exhibited remarkable improvement and is
now more risk-based. With major operational transformation, the SBP now serves
as a model for local and international
banks, he concludes.
By December 2014 we
can expect HabibMetros
ADR to mark at
55-58 percent
Interview by
Ali Khizar & Sobia Saleem
View from the stock market

Rabia Lalani
Valutation Summary of Banking Sector Stocks

Bank
Stance
M.P
T.P
25-Feb-13
Habib Bank Limited
National Bank of Pakistan
MCB Bank Limited
United Bank Limited
Bank Alfalah
Allied Bank Limited
Bank AlHabib
Meezan Bank Limited
BankIslami Pakistan
Askari Bank
Market weight
Market weight
Under weight
Market weight
Over weight
Market weight
Over weight
Over weight
Over weight
Market weight
158.69
57.35
266.77
133.51
27.98
88.79
39.51
37.48
8.96
13.37
147.92
54.24
249.63
137.40
29.01
90.61
46.07
44.00
13.00
14.00
P/E
P/BV
Dividend Yield
2012*
2013*
2014
2012*
2013*
2014
2012*
2013*
2014
6.29
5.28
8.65
4.86
4.71
6.03
5.50
6.97
11.97
9.36
7.94
9.42
11.62
7.05
5.95
5.24
6.39
8.40
26.09
N/A
8.24
7.67
11.21
8.16
6.72
7.84
6.56
7.35
6.35
16.92
1.11
0.56
1.61
1.02
0.71
1.28
1.25
1.48
0.88
0.60
1.22
0.69
2.36
1.37
0.84
1.28
1.31
1.80
0.66
1.30
1.35
0.78
2.32
1.58
1.08
1.40
1.41
1.77
0.77
1.09
6.6%
14.4%
7.4%
11.8%
13.7%
8.6%
10.1%
5.5%
0.0%
0.0%
6.4%
8.5%
5.6%
9.0%
9.6%
7.1%
9.2%
4.6%
0.0%
0.0%
5.9%
10.3%
5.8%
7.3%
8.6%
7.0%
8.5%
5.3%
0.0%
0.0%
Highlighting Traits
Improvement in CASA and NIMs
Signicant reduction in CASA and focus on islamic banking
Attractive NIMs and strong recoveries
Improvement in asset quality and attractive NIMs
Deposit growth due to branch addtions and improvement in CASA mix
Strong non-interest income and strong equity portfolio
Improved asset quality, fast NIM growth and attractive coverage ratio
Pioneer of Islamic banking, strong brand equity
Tremendous deposit growth and lower cost of funds
Declining NIMs, with huge NPLs
Source: Average estimates of following brokerage houses:

AKD Securities, Global Securities Pakistan Ltd, Topline Securities, Taurus Securities Ltd, JS Global, Foundation Securities Ltd, BMA Capital, KASB Securities, Optimus Capital Management, Elixir Securities Ltd
* Calculated on average market prices
For a year that saw benchmark Karachi Stock

Exchange grow by 49 percent, 2013 saw banking
stocks underperform the market by 17 percent.
This was both a result of macroeconomic
conditions in the country that kept private
sector credit in check and bank-unfriendly
initiatives taken by SBP during the year.
To jog down the memory lane, the SBP
increased minimum deposit rate on savings
account from 5 percent to 6 percent during the
year. Later, it linked minimum deposit rate
(MDR) with the repo rate, thus limiting banks
merry-go-round sessions.
Linking MDR in times of monetary tightening,
however, proved difcult for banks, especially
for those which had higher savings deposits as
percentage of total deposits. This prompted
banks to alter their deposit mix to lower their
costs. In the meanwhile, the exemption of
Islamic banks from this regulation gave them a
reason to cheer about.
On the ipside, a major boost for banks

came from improved asset quality. Although
increase in discount rates prompted banks to
focus on investment in risk-free government
securities than on private sector credit, leading
to improvement in non-performing loans and
robust coverage ratios.
Looking ahead there is some level of
optimism in the banking sector which is
expected to outperform in 2014 as the
dynamics are changing. According to Ujala
Adnan, a banking analyst at Elixir Securities,
Islamic banking, branchless banking and
cost-rationalization are the key areas that banks
are drumming on to these days. She asserts that
as asset quality of the banks has improved
considerably, private sector credit off-take is
likely to shoot up going forward.
Contrary to this, Iqbal Dinani, a sector
observer at BMA Capital, is a bit cautious on
banking sector. He believes that margins might
not increase substantially as banks have heavily

invested in risk free government securities
where margins are quite narrow.
However, Dinani considers that focusing on
increasing advancing activities will help the
performance of banks to come on track. Higher
coverage ratio and lower NPLs are the key
strengths of banking sector at this stage. He
says the banks may start lending prudently
during 2014 while aggressive lending is likely to
start from 2015 and onwards.
In this context, BR Research conducted a
survey of equity fund managers of leading
asset management companies regarding their
outlook of banking sector. The survey
represents nearly 77 percent of the entire fund
size of the mutual fund industry.
The survey reveals that fund managers deem
banking sector at this stage as a defensive play,
terming macro-economic concerns particularly
depressed private sector credit off-take and
compressed margins as the culprits at the back

of muted performance of banks.
Most fund managers say that dividend payout
announcements and further monetary
tightening can help pick up the performance of
banking stocks on the local bourse, provided
uptick in business activities and increase in
credit off-take bring this sector back in
limelight. In short, the consensus stance on
banking sector is weighted as neutral in the
short-term, whereas any improvements at the
macro-economic level may act as a trigger and
lift the stance from neutral to positive.
The writer works as

Research Analyst at
Business Recorder.
rabialalani@gmail.com
SWOT analysis of the banking sector

Strengths:
Stringent regulatory framework
Robust risk management practices
Signicant growth in deposit base
Minimum capital requirements adequately satised by all but ve smaller banks
Sufcient branch network
Increasing focus on non mark-up income
Weaknesses:
Lack of innovative lending products
High dependence on spreads
Increased investment in government securities resulting in depressed private sector credit off-take
High percentage of savings deposits as a percentage of total deposits
Opportunities:
Fresh private sector credit off-take
Increase in market share through internet and mobile banking,
which can reduce operational costs over time
Introduction of new products, such as branchless banking
Threats:
Continued monetary tightening, which may hamper the growth in credit off-take
Listing of government securities and corporate Sukuks
Attractive rates on national savings schemes
Banking:
An unconventional view
Syed Bakhtiyar Kazmi
Banks are the overseers of a nations premier
asset, its savings deposits; unless of course
that nation is blessed with surplus oil reserves
in which case the government could care less
about monetary shenanigans.
Frankly, oil rich autocracies, which are the
rule by the way, need neither indulge in
brilliance of conception nor excellence of
execution, petrodollars buy everything.
Economists, the forbearers of doom, have
even managed to showcase oil wealth as a
disease and coined a phrase for it. Still, all
nations dream of being compared with the
Dutch, and for good reason too. Empirical
evidence clearly establishes that booms are
sweeter for oil rich nations and recessions
avoid them like the plague!
Pakistans dreams for oil elephants are far
from fruition; accordingly the nation, by
default, has to ensure efcient utilization of all
other resources, if it ever expects to be
elevated to the ranks of developed nations.
The standard formula for development of an
agricultural economy is through an industrial
revolution, which requires investment of its
savings in projects that create employment
and increase productivity. Banks can play a
pivotal role in channelling precious resources
either towards self sustainability or funding
wasteful consumer choices leading to abject
dependence; or worse.
The evolution of banking remains dependent
on the mischief of money and ever since the
invention of at money, the business of
banking is potentially riskier than an invasion
force armed to the teeth with WMD; sub-prime
and euro debt crises are proof of the carnage
and chaos banks are capable off.
For a long time preceding the crises, it was
actually believed that money and its ilk had
actually moderated, or was it tamed, the
business cycle; a clever idea down the drain.
Business cycles rule supreme, unchallenged;
what fools these mortals be!
Governments were always cognizant of
these associated hazards, if not their ferocity,
and have endeavoured to establish a foolproof
regulatory regime for banking; unfortunately
never succeeding. The events of 2008 have
effectively exposed the inability of the latest
banking standards established under the Basel
Accord to identify a storm, let alone prevent it.
If Basel-II had been remotely effective, the
double jeopardy should have been prevented,

so why invest in Basel-III? Rationally, prescient
and sincere legislation would have kept banking
simple; why approve complex derivatives
contracts in the garb of innovation, which
nobody understands, not even their inventors.
Nonetheless, and irrespective of the tenacity
of the fraudsters to dream up innovative and
unfathomable schemes to regularly and
repeatedly defraud the public out of their
deposits, banking remains the only vehicle to
mediate between savers and investors. So while
the cat and mouse game continues between the
bankers and their regulators, what matters most
is the scorecard. Has the banking sector of the
nation succeeded in efciently deploying the
monetary resources of the nation?
Notice that the protability of individual
banks or protability of the banking sector as a
whole were not included in the scorecard
statement, in fact they dont even merit a
footnote. Surprised?
Conventional wisdom dictates that a strong
and growing banking sector is a barometer of a
nations economic prosperity. As of now, all the
banks in Pakistan are protable, and in fact
some are doing exceptionally well for a number
of years. This prosperity, if the idea had been
on the money, should have translated into, a
booming national economy, a strengthening
rupee, low ination, a reducing trade
imbalance, increasing foreign reserves, a
depleting national debt and full employment;
which obviously it hasnt. Another clever idea
down the drain!
A small clarication at this point; this is
neither the forum nor is there sufcient space
to get into a protracted critique of western
dogmas; logical conclusions will have to sufce.
On the other hand the simplicity of the
preceding deductions stands witness to their
authenticity, if the objective had been deceit
and fabrication, complex and muddled
articulation would have been the preferred
option. Frankly, the propensity of domestic
intelligentsia to readily accept any theory
stamped Made by Gora, without independent
thought, is remarkable.
Once again, where is Pakistan on the scorecard?
The economy is hardly booming, sectors in
desperate need of funding are seemingly
denied credit. Other than debatable power

projects there has been hardly any project
investment that merits a special mention,
unemployment has reached epidemic
proportions and the situation of the rupee,
foreign currency reserves, trade decit and
rising national debt are regular breaking news
on the electronic media. Except that the banks
are making money!
Ignoring that the spread, the difference
between interest rates, which the banks pay
their depositors and what they charge their
lenders, is quite judicious in Pakistan, if the real
economy is reeling, why are the banks allowed
to make money? Puzzling indeed!
Dont forget the foundations of banking
business are built upon monopoly rent and
banks are protected by stringent entry barriers;
establishing a bank requires a government
license which is not easily forthcoming.
Apparently banks are lending the savings of
the nation back to the government and earn a
spread thereon, and there is nothing illegal
about that. Admittedly, the big banks were
privatized to circumvent government
hegemony on banking credit, but in an
uncertain and highly-charged environment, the
banks cannot be blamed for choosing the lessrisky option, lending to the government rather
than to the private sector, especially when the
spread remains high.
Another avenue for deployment of banks
funds is the equity market. Considering the
frequent debacles, it is a wonder that like direct
investment in property, stock are not on the
regulators restricted list. Especially when funds
diverted towards equities cannot be utilized for
projects in the real economy. Once again,
theories on the importance of the stock market
are sidestepped; the dotcom of the late 90s
should be sufcient evidence of their veracity.
It is said that the world is in a state of
bankruptcy, that the world owes the world
more than the world can pay, Ralph Waldo
Emerson. Brilliant articulation which can easily
be broken down into its sub-sets, simply
substitute the word World with Pakistan, or
most any nation today, for that matter!
Globally, banks were bailed out and remain
hugely protable, the stock markets are again
booming, property prices are again reaching
bubbling heights, governments continue to
borrow unfettered and all this courtesy central
banks, who continue to ease money supply.

Everyone making money is ne but what about
the populace?
Before moving towards a conclusion, a few
statistics, which the editor informs, are
apparently necessary to establish credibility;
which is rather amazing since hardly anyone
understands them.
Broad money, M2, increased from Rs8.39
trillion in May 2013 to Rs8.93 trillion in November 2013, which establishes that easing is
progressing with ease. Most of this money
ended up in the form of deposits with banks
that at December 2013 have invested or lent
Rs4.1 trillion to the government as compared to
Rs3.1 trillion to the private sector, although
there is an increase in private sector credit
since June 2013. How much exposure that
banks have in the stock market requires an in
depth analysis, which would hardly improve the
basic premise, and hence the particular
enterprise was not embarked upon.
With that out of the way, it is fashionable to
be a Keynesian again! Even more curiously
nudging investment towards growth sector by
governments is not considered a taboo
anymore. Will wonders never cease?
In conclusion it is imperative that the
government utilizes the nations savings in
projects of national importance, which are
necessary for economic growth, creation of
employment and export substitution; even, if
required, through provision of cheaper credit.
Unless the real economy thrives, prosperity
within the nancial sector will remain at risk and
will largely be a mirage.
A healthy banking sector and a healthy industrial
sector are both equally important.
The writer is a Chartered Accountant

based in Islamabad.
Saving mortgage nance

Sidra Farrukh
Home ownership is often used as a proxy for
achieving prosperity like that in the US. While
living an American dream might not be a
priority for Pakistanis, owning a house is a
major component of social infrastructure in
the country.
The need for a housing policy is quite apparent
given its socio-economic benets and its impact
on the real sector and thereby on macroeconomic variables. Cognizant of this fact, the
State Bank of Pakistan has time and again also
emphasized its scal benets for the government.
Yet the country continues to face a dearth of
housing units especially for low and middle
income groups. Today, with a rising population,
the country is fraught with limited access to
housing and mortgage loans characterised by
absent long-term nance and property rights.
The underdeveloped house nance market
contributes less than one percent to the
countrys GDP as per the latest available SBP
data, while elsewhere in the world, mortgage
loans make up a sizeable chunk of the
economic output.
Take for instance India,which is way ahead
when it comes to nancial maturity. Not only is
house nance a priority sector in India due to
rapid urbanisation and economic growth,
mortgages are also the largest components of
its banking sectors retail side.
A major growth driver for house nance in the

South Asian goliath is its National Housing Bank;
the regulatory body provides institutional
framework and long term loans to low and
middle income segments. Though, House
Building Finance Company is one specialized
housing bank in Pakistan with a mandate to
provide loans lower-middle and a low-income
group, its share in total house nance has
reduced in absolute terms over the years. House
nance has become expensive in Pakistan and is
still restricted to higher-income populations.
Challenges
One could easily overestimate the maturity of
mortgage lending in the country after going
through the strategic goals for house nance
by the Infrastructure and Housing Finance
Department of SBP. The reality is still far behind
from whats on paper. Of the major challenges
that shroud the domestic mortgage based
nancing, experts speak of the lack of a
regulatory framework, absence of secondary
mortgage market and long-term xed interest
rates as the prime ones.
Also, the reluctance in mortgage lending by
the banking sector is due to poor tenancy,
possession and foreclosure laws and weak
enforcement. This can indeed be seen from the
declining trend in real estate exposure by the
Declining real estate exposure in total credit to non-govt sector

Total Credit to Non Govt.Sector (LHS)
Share of Real estate exposure (RHS)
Rs(bn)
4,000
7%
3,500
6%
3,000
5%
2,500
4%
2,000
3%
1,500
1,000
2%
500
1%
Jun
06
Feb
07
Oct
07
Source: SBP, Economic Data
Jun
08
Feb
09
Oct
09
Jun
09
Feb
11
Oct
11
Jun
12
Feb
13
Oct
13
banks in the total credit to the non-government

sector. The average annual cumulative real
estate exposure of the banking sector has
toppled from an already miniscule 5.6 percent in
CY08 to a dreary 3.9 percent in CY13.
Then, of course, the unprecedented rise in
property prices, driven primarily by the rising
demand, cost of land and construction material,
urbanisation and speculative activity in real
estate, has continued to impair affordability for
those seeking housing. This has adversely
impacted the mortgage nancing in the country.
Experts reckon that when it comes to
nancing solutions for the middle and low
income segments, the awareness and
acceptability of the products are marred by
mistrust and uncertainty. And lets not forget,
the acceptability of an interest-based nancial
system has been a restricting factor for the
conventional banking industry.
Islamic banking industry can take the lead here,
especially in the signicantly untapped lowermiddle class segment, which is in dire need of
shelter. Already, Islamic banking has made strides
into the mortgage market with around 25 percent
share in the countrys house nance.
According to the SBP data, the formal
nancial sector accounts for only one to two
percent of total housing transactions in the
country, while the informal lending caters to
around 10 to 12 percent of the total. Whereas,
the rest of the housing nance is arranged
through personal resources, showing a tiny
share of mortgage-based lending in the country.
What needs to be done?

First things rst, market oriented housing
reforms are the need of the hour. Though, the
law for property registration and transfers
exists, inefciencies within the system make
the process cumbersome.The key lies in
strengthening the institutional framework
which includes land administrative procedures,
property titling and legal provisions.
Improvement in house nance is also
contingent upon the introduction and
enforcement of foreclosure laws to ensure
effective recovery of loans from the defaulters.
Also, introducing new housing development
and nance-related products is mandatory
that caters to the needs of the neglected: the
middle and low income segment.
While the recent cap on real estate exposure
by SBP might be seen as a restrictive attempt
Mortgage as a percentage of GDP

Pakistan
1%
Indonesia
2%
Bangladesh
3%
India
China
Thailand
Korea
Malaysia
Singapore
Hong Kong
USA
UK
7%
12%
17%
26%
29%
32%
41%
80%
86%
Source: SBP, House Finance Review 2005-11
by some, others call it secondary to the main

challenges like the lack of foreclosure and
tenancy laws. The argument holds weight as it
will take some time for the nancial sectors
exposure in mortgage nancing to shoot from a
dismal three percent to 10 percent.
However, reformist attempts are crucial
especially after the apex courts decision to
strike down Section 15 of the Financial
Institutions Ordinance 2001, which empowered nancial institutions to sell mortgaged
property without recourse to the court. Though
a step in the right direction that gave lenders
undue power over the borrowers, experts also
fear the decision will not only increase banks
resistance to extend mortgage loans but also
make them hold back lending to private
businesses in future.
All in all, the work to salvage house nance
should pick up immediately by improving the
regulatory environment, before the rising interest
rate scenario and rising property prices do away
with whats left of mortgage-based lending.
The writer works as

Research Analyst at
Business Recorder.
sidra.farrukh@br-mail.com
Banking sector assets growing in favour of investments

Total assets (R.H.S)
IDR
Improving CASA
ADR
Deposits (RHS)
80%
Rs(bn)
10,000
70%
70%
9,000
65%
60%
8,000
50%
7,000
40%
6,000
30%
5,000
20%
CY08
CY09
CY10
CY11
CY12
4,000
Sep-13
CASA
Rs(bn)
6,900
5,700
4,500
60%
3,300
55%
2,100
50%
CY08
CY09
CY10
CY11
CY12
Lending split of different banking tiers (Sep-13)

Staff loans
Agriculture
Corporate sector
Consumer finance
0%
15%
30%
0.25%
SME
Commodity finance
45%
60%
75%
900
Jun-13
27%
90%
105%
Top 5 banks
Deposit mix
Current accounts
Saving deposits
Fixed deposits
Call deposits
Other deposit accounts
6-10 banks
11-20 banks
30%
1%
21-28 banks
Foreign Banks
41%
Specialized Banks
Breakup of Industry deposits by account type
Segment-wise advances & infection ratio (Sep-13)
Current accounts
Infection ratio
50%
Fixed deposits
40%
SME
Rs(bn)
0
1,000
30%
20%
Agriculture
Consumer finanace
10%
0%
Corporate
Staff loans Commodity finance

0
500
1000
1500
Advances Rs(bn)
2000
2500
3000
Top-10 sectors (in terms of lending) & their infection ratio (Sep-13)
50%
Electronic
Infection ratio
40%
30%
20%
10%
Textile
Cement
Transportation
Chemicals
Financial
Individuals
Agriculture
Sugar
0%
0
100
Energy
200
300
400
Advances Rs(bn)
500
600
700
800
Saving deposits
Call deposits
Other deposit accounts
2,000
3,000
4,000
5,000
6,000
7,000
8,000
CY08
CY09
CY10
CY11
CY12
Jun-13
Average deposit per bank account

No. of bank accounts
Average deposit size (L.H.S)
Rs('000)
210
(mn)
40
190
35
170
30
150
25
130
20
CY08
CY09
CY10
CY11
CY12
Jun-13
Foreign constituents
Others
Breakup of
industry
deposits by
depositor
type
(June-13)
Industry infection ratio
Government
Non-financial PSEs
Advances (R.H.S)
NBFCs
Rs(bn)
4,000
19%
Personal
3,800
17%
Prviate sector enterprises
NPLs and coverage
3,600
15%
13%
3,400
11%
3,200
9%
Trust funds & non-profit organizations
NPLs
CY08
CY09
Category-wise NPLs to total loans
550
450
350
250
150
CY09
CY10
CY11
CY12
Sep-13
%
35
30
25
20
15
10
5
0
10%
950
9%
800
8%
650
7%
500
6%
350
5%
200
CY08
CY09
CY10
CY11
CY12
Sep-13
Category-wise ROE
65
55
CY08
CY09
CY12
Sep-13
45
CY08
CY09
CY10
CY11
CY12
Infection ratio-Islamic banking

Infection ratio-industry
Salam
Financing
mix of
Islamic
banking
industry
22%
Murabaha
18%
14%
10%
Diminishing
Musharaka
6%
Musharaka
4%
Ijarah
2%
Mudaraba
CY08 CY09 CY10
CY11
CY12 Sep-13
Islamic branch network
Public sector commercial banks

Specialized banks
Foreign banks
Local private banks
No. of branches (L.H.S)

Average deposit per branch
%
2.0
12
Rs(mn)
700
1150
1.5
1000
1.0
6
3
0
CY08
CY09
CY10
CY11
CY12
Sep-13
600
850
0.5
700
0.0
550
CY08
(0.5)
Sep-13
Islamic banking infection ratio
Others
Local private banks
15
(6)
CY11
18
(3)
CY10
Category-wise ROA
Foreign banks
3,000
75
Share in banking industry
1100
Sep-13
85
Istisna
Rs(bn)
CY12
95
Islamic banking growth

Islamic industry assets (L.H.S)
CY11

Foreign banks
Local private banks
Specialized banks
%
105
Rs(bn)
650
CY10
Category-wise coverage ratio

Foreign banks
Local private banks
Specialized banks
Loan Coverage
CY08
Infection ratio
CY09
CY10
CY11
CY12
Sep-13
400
500
400
CY08
CY09
CY10
CY11
CY12
Sep-13
300
Top 5 banks in terms of CASA (As of Sep'13)
Top 5 banks in terms of ADR (As of Sep'13)
90%
80%
85%
70%
80%
75%
60%
70%
50%
65%
40%
60%
MCB
HBL
BAFL
BAHL
NIB
AKBL
Silk Bank
Faysal Bank
Samba
NBP
Top 5 Banks in terms of CEO remuneration (Data based on annual reports -2012)
143.53 (Rs. mn)
97.92 (Rs. mn)
99.97 (Rs. mn)
Top 5 banks in terms of IDR (As of Sep'13)
Top 5 banks in terms of spread ratio

65%
130%
100%
55%
85%
50%
70%
45%
55%
40%
160%
140%
120%
100%
35%
40%
Samba
MCB
MEBL
BAHL
SCB
JS
Banks with the highest infection ratio
Banks with the highest coverage ratio

180%
60%
115%
82.13 (Rs. mn)
83.16 (Rs. mn)
MCB
UBL
MEBL
HBL
80%
NBP
ABL
BAHL
MEBL
Industry average of
listed commercial banks
(As of Sep-13)
50%
45%
40%
35%
30%
25%
20%
15%
KASB
BOP
NIB
Summit
Askari
Banks with the lowest infection ratio

11%
8%
5%
2%
BIPL
MEBL
BAFL
ABL
BAHL
ADR
52%
IDR
51%
Infection ratio
16%
Coverage ratio
79%
CASA
59%
Spread ratio
38%
Non-funded income to total income
15%
Saving deposit to total deposit ratio
34%
SAMBA
Meezan Bank CEO

anticipates a larger share of pie
Irfan
Siddiqui
Founding President and

Meezan Bank Ltd.
BR Research: Take us through the journey

of Meezan Bank so far.
Irfan Siddiqui: Meezan Bank was launched
in 1997 as an Islamic investment bank, and
the first three years of its life were as an
investment bank. We got the opportunity
to venture into commercial banking
through acquisition of Societe Generales
operations in Pakistan back in 2002.
From that point we have grown from just
one small office in 2002 with a staff of 30,
to over 350 branches in more than 100
cities across the country now. The
response from the market has been very
positive. It is a combination of what we
offer to our customers and their receptiveness. Ten to fifteen percent of the population will always be die hard Islamic banking
customers and there would be another 10
percent who might not be.
This leaves you with the remaining 80
percent. If you provide them the right
service, pricing and environment, there is
no reason why they should not come. We
call them as why-nots, that if you offer
them a good Islamic package, they will
come to Islamic banking. Just labelling your
product would not help, as people are well
aware in the market. Offering a truly
Shariah-compliant product is a must for the
Islamic banking model to be sustainable.
BRR: Did you have to create the demand
among the why-nots?
IS: You must make conscientious efforts to
market your products. The product
positioning and availability are critical for
achieving success and that is what Meezan
Bank has done. An edge that Meezan has in
Irfan Siddiqui is the founding President & CEO of Meezan Bank Ltd. He initiated the formation of Al-Meezan Investment Bank in 1997, which was converted into a full-fledged scheduled Islamic commercial bank in May 2002. This was the first ever license to be given for
Islamic commercial banking in Pakistan. Meezan Bank is now the largest Islamic commercial
bank in Pakistan with 351 branches spread across 103 cities.
Siddiqui is a Chartered Accountant from England & Wales and has extensive financial sector
experience with Abu Dhabi Investment Authority, Abu Dhabi Investment Company, Kuwait
Investment Authority and Pakistan Kuwait Investment Company.
the market is that we deliver what we

promise, not only in terms of product but
the overall environment as well. Deep
inside their hearts people have to be
convinced on what they are working for.
BRR: With a lot of conventional banks
growing their share in the Shariahcompliant segment, how does Meezan
manage to differentiate from the pack?
IS: We have never conscientiously tried to
differentiate ourselves our aim and wish
is that the market should grow. We have
never seen other Islamic banks or windows
as direct competition to Meezan Bank.
Instead, we work with them and support
them; we share good assets with our peer
Islamic banks, which is how the market will
gain depth and growth.
The differentiating factor is up to the
consumer; we grow as the industry grows.
For some it would be pricing, for others it
would be accessibility or environment it
all depends on the consumer. We would
never advertise saying how we are
different from other Islamic banks.
BRR: Does the whole industry have a
similar set of principles and guidelines?
IS: We have the same regulator and the

SBP Shariah board on the macro level.
Within that, every individual bank has its
own Shariah board, all pre-approved by the
State Bank of Pakistan. There are minor
differences of interpretation not a matter
of right or wrong - and it does not impact
the Shariah compliance of Islamic banks.
BRR: Critics say that a lot more needs to
be done to make the system fully Shariah
compliant. Whats your view on that?
IS: On the question of Shariah compliance, I can safely say that we are 100
percent Shariah-compliant. Whether we
can do even better is another thing and yes
there are areas in which we can get even
better, but that does not take anything
away from our compliance.
BRR: Is our model any different from the
Malaysian model in terms of compliance
strictness?
IS: The Malaysian model has some
difference, but by and large everybody in
the industry is following the compliance
guidelines to a good extent. The industry is
moving in uniformity; the latest example is
I see the Islamic banking industry growing

at double the pace of conventional banking
for a good five to seven years.
our recent advertising campaign, that was

released from one platform which included
the State Bank and all Islamic banks and
windows.
It is in the interest of all the players in a
comparatively new industry to go hand in
hand as we fully realise that we cannot
move on to the next level in isolation. You
need to have a critical mass and Meezan
Bank provides that to the industry as the
industry leader.
BRR: Why is the penetration still quite low
in Pakistan despite having such a massive
Muslim population?
IS: The industry started very late and the
performance has been satisfactory in my
view. We are 10 percent of the industry
right now, which is commendable, given
that this is a new industry in the Pakistani
financial sector. And I believe that the next
10 percent growth would be comparatively
much quicker. I see the Islamic banking
industry growing at double the pace of
conventional banking for a good five to
seven years.
Interview by
Zuhair Abbasi and Sobia Saleem
Money that prays

Ahmed
Khizer Khan
Burj Bank
BR Research: Despite being one of the

largest Muslim majority countries, the
penetration of Islamic banking in Pakistan
is still low. Is the environment not conducive enough?
Ahmed Khizer Khan: In Pakistan, Islamic
banking penetration stands at about 10
percent in terms of overall deposits of the
industry. Considering that it has only been
11 years since the re-launch of Islamic
banking, this percentage reflects an
unparalleled growth trajectory.
While the market shares of Islamic
banking in other Muslim countries like
Kuwait, Malaysia, Saudi Arabia and the UAE
are much higher, these markets are much
more mature in terms of the tenure of
Islamic finance. It would be safe to
conclude that the growth of Islamic
banking in Pakistan has been exceptional.
It is also important to note that the overall
penetration of banking is low in our
country whereby till date the banking
sector has only been able to tap roughly 20
million customers.
BRR: Whats the market potential?
AKK: It is enormous. According to our
analysis, an untapped banking market of
over 40 million customers still exists
within the country. Islamic banks in
Pakistan are presently in their evolution
phase thus providing enormous potential
to grow this market.
BRR: So then what is preventing the
industry from realising this potential?
AKK: Currently, the greatest challenge to
growth is the awareness gap and the central
bank has taken some very significant steps
in this regard including a mass media
Before joining Burj Bank as its President and CEO, Ahmed Khizer Khan worked as Chief
Operating Officer of ICD (Islamic Corporation for Development of the Private Sector),
Jeddah. ICD is one of the two main sponsors of Burj Bank and is a group company of Islamic
Development Bank (IDB), Jeddah.
Prior to joining ICD, Khizer was the Chief Executive of Barclays Global Retail and Commercial Banking, the UAE from 2006 to 2010. He was associated with Citigroup from 1997 to
2006 in various senior level assignments including Country Business Manager, Pakistan
and Managing Director Operations and Technology, Central Europe.
In this interview Khizer talks about future and potential of Islamic banking and challenges
thereof. He also sheds light on how the pegging of minimum deposit rate can trigger
private sector credit off- take.
awareness campaign launched this year.

However, Islamic banks must also
contribute at their own level towards this
awareness drive by conducting micro
marketing initiatives, seminars and mass
communication campaigns which promote
the values and supremacy of the Islamic
financial system.
The second greatest challenge facing the
industry is the human capital gap. The SBP is
playing a pivotal role in this regard with NIBAF
(National Institute of Banking & Finance)
being at the forefront of these initiatives.
Given the dynamics and psychographics
of our consumers, Islamic banking has the
potential to become the system of choice
within the country. With the commitment
of our regulators, I have no doubt that this
will be made possible in times to come.
AKK: Since Shariah is the basis of Islamic

banking, therefore, Islamic banks cannot
lend money or price money because it is
Riba and that is prohibited as per Shariah.
Instead of lending money or offering
working capital financing, Burj Bank
finances the need of the customer in the
form of commodities, goods or assets.
For example, if the customer requires
working capital for raw material purchases,
Burj Bank offers Murabaha financing (cost
plus profit sale). Similarly, if the customer
is a manufacturer and it requires financing
to manufacture goods, Istisna is offered to
them. Recently Burj Bank has also launched
a structured financing product for the
service sector, Service Ijarah and a working
capital financing product for finished
goods called SAHL.
BRR: Islamic banks face problems in asset

creation and liquidity management due to
a lack of short-term Islamic instruments
offered by the government. How is Burj
Bank tackling the maturity gap?
BRR: Islamic banks are privileged in terms

of not having a floor on saving deposits.
Besides, asset-backed financing also curbs
NPLs. How are the Islamic banks leveraging
these factors to be better than the
conventional banks?
AKK: Due to lack of Islamic Instruments for

liquidity management and an underdeveloped Islamic finance market, Islamic
banks are facing some problems in
managing liquidity. An under-developed
money market as well as limitations in
money market instruments are also major
constraints towards the liquidity management process. Having said that Burj Bank is
efficiently managing liquidity with greater
reliance on interbank placements through
Mudaraba, Musharakah and Wakalah with
Islamic banks and through commodity
Murabaha with conventional banks.
BRR: Islamic banking is limited in its ability
to offer personal finance. How are the
Islamic banks battling against that?
AKK: It has surely helped Islamic banks in

providing actual rate of returns to the
customer but at the same time it has
created a new challenge of providing
competitive rates to saving depositors
while managing the liquidity issue.
Since Islamic banks finance the need of
customers instead of lending money,
therefore all the transactions of Islamic
banks are backed by assets. This is the
primary differentiator which makes Islamic
Banking superior, balanced and more
secure in comparison to conventional
banking. The recent global financial crisis
has proved this point. An IMF study
conducted in the aftermath of the recession compared the performance of Islamic
banks and conventional banks during the

financial crisis, and found that Islamic
banks, showed stronger resilience during
the global financial crisis.
According to the report, Islamic banks
worldwide performed better than conventional ones in terms of profitability, credit
and asset growth. The profitability crunch
of Islamic banks worldwide was less than
10 percent, whereas the profitability of
conventional banks slumped by more than
35 percent.
BRR: Will the pegging of minimum deposit
rate with discount rate trigger private
sector lending? How will the banks combat
spread shrinkage?
AKK: It is most likely to generate private
sector lending. To counter the impact on
spreads, banks will now move to more
lucrative avenues, which include penetration in consumer segments.
Besides, product innovation keeping in
view the revision of Prudential Regulations
by SBP for small and medium enterprises,
may also attract program lending to small
enterprises, which offer better returns.
Though, there is a possibility that private
sector off-take will improve but corresponding increase in economic activity is
also pivotal to make the risk taking
worthwhile. Banks may continue to shy
away from assuming risk until the private
sector demand remains depressed and
pressing issues like energy crises continue
to dent the economic activity.
Interview by
Zuhair Abbasi & Sobia Saleem
BRANCHLESS BANKING
SECTION
Omar Moeen Malik,
Head of Strategy, Easypaisa

Omar has been part of the core Telenor Easypaisa team since
before its launch in 2009. Prior to his 3-year experience in Mobile
Financial Services, he gathered over 4 years of GSM experience
with Telenor where he headed the Value Added Services
department. Omar holds a B.Sc. in Computer Sciences from the
University of Texas at Austin and an MBA from LUMS.
Schooldays generally start for children by the time they are 4-5 years old. But it seems that Pakistans
5-year old branchless banking (BB) sector is itself schooling the developing world on how its done.
Global financial institutions consider Pakistan as a BB innovation laboratory, while private philanthropists are keen on the socioeconomic spillovers.
Five years after the State Bank of Pakistan (SBP) issued detailed BB regulations a first in South Asia
the non-existent market base has now grown to 7 service providers (more pilots are underway) and
over 100,000 retail agents. As of September last year, the sector was handling transactions worth
nearly $25 million a day or over $700 million a month! All the mobile network operators are now deeply
involved, as are some of the leading commercial banks. Those currently not in the mix also seem
interested some are dipping their toes by partnering with existing players, while the rest of the
fence-sitters are finding it hard to ignore this sector any longer.
This special BB feature which is an acknowledgment of the promise this sector holds to bridge the
gaping financial divide, also an accolade to the SBPs enabling and proactive role intends to highlight
the sectoral performance with a forward-looking agenda. Readers will find pictorials that describe this
growth story over the years. Then there are market insights on key learning and challenges, for which
BR Research interviewed three individuals who have led BB deployments in their respective organisations right from the start. Due to space constraints, we could include these insights from the top 3 BB
service providers (based on SBPs market shares as of September, 2013).
BR Research appreciates the divergent perspectives (especially the telco-bank divide and the
financial inclusion vs. financial access debate) on how best to mainstream the financially excluded
population. We are witnessing a growing private sector appetite in this sector, which is a good omen for
increasing the coverage and usage of financial services in the country.
Key Learnings
Even simple financial services make a huge
difference in the lives of people. This is
evident from the customers we interact
with and the stories we get to hear. But
people want more than just transactional
services. That is why Easypaisa is the first
BB service in Pakistan to venture into more
than just transactional services with
products like Khushaal Beema, Khushaal
Munafa and ATM Cards. Another key
learning is that apart from convenience
and reliability, security is also very important to the customer.
There is still a huge untapped need for
more convenient and more accessible
financial services, especially at the bottom
of the pyramid or those we call un-banked
or under-banked. We estimate a total of
60 million users who have a need to use
branchless banking services and Easypaisa
is only serving 6 million every month.
customers over from over-the-counter

(OTC) services. Not all customers carry
their Nadra CNICs at all the times. Moreover, verifications from Nadra on important
transactions are often expensive. Collecting an image of the customer, an image of
the CNIC and a physical visit to an agent
location are restrictive. SBP can revise the
BB regulations to introduce a true entry
level account for customers who can
sign-up easily. Account limits also need to
be revised to provide an incentive to
customers to migrate to BB accounts.
There is a great need to digitise
payments, especially the G2P and P2G
payments, which are typically held in
monopoly between a few banks and force
customers to inconvenient, timeconsuming options of payments. Anybody
would know the difficulty one faces to pay
for a traffic challan or a Nadra CNIC card
fee at a NBP branch.
Challenges
One of the main challenges we face is that
the regulatory requirements for BB
accounts are not attractive to move
Customer preference for OTC transactions

There are literally no barriers to using OTC
services. Customers can simply walk up to
the agent and carry out a transaction in a
few minutes. There is no sign-up required

and the entire transaction is merchantassisted. Even with low literacy levels,
customers dont have to do anything but
go to their nearest agent with their CNICs.
There has to be a greater focus on BB
accounts by the players. At the moment,
with so many new players coming into the
market in the last 15 months, most of them
are focused on fighting over existing
agents and setting up their OTC transactions, with some not even promoting their
BB accounts. However, BB players
currently incur a heavy cost in opening
each BB account. There are commissions
to pay and Nadra verification charges
(amongst other costs), which are almost
twice as much is charged to other
commercial banks. The revenue from a BB
account is so low that it often takes the
payback period up to a year on the initial
account opening costs. So its imperative
to reduce these costs.
Customers need to be offered more than
money transfer and bill payment services
on their BB accounts. Since these services
are available on OTC as well, the BB
Abrar A. Mir | Group Head and EVP,
Branchless & e-banking, United Bank Limited
On Omnis four-year journey so far

UBL Omnis four-year journey is just the
beginning of providing affordable basic
financial services to the masses via BB
services, i.e. via retail outlets. There is a
huge demand for BB services by consumers who need to send money, receive
money, pay their bills and keep their
savings secure yet readily available for use.
A key learning is that the industry needs to
continue to increase awareness and
promote usage of these services to more
fully realise the potential of these services.
Another key learning is that consumers

have repeatedly exhibited their willingness
to try new products and services. This
trend has been observed in both rural and
urban markets. UBL Omnis experience
with the G2P payments projects for the
poor and underprivileged that reside
mainly in remote rural areas, demonstrated
that those people were equally keen as
their urban counterparts in learning the
usage of BB channels. Due to this, the
industry has many opportunities to take
new products for consumer trial.
A few myths need to be debunked, as well.

Unlike general perception, there is no
definite urban-sender, rural-receiver
pattern out there, for rural areas are also
the origins of BB transactions and lots of
small cities are also generating good
volumes. Another myth is that people are
sending money back home for monthly
expenses. That is not entirely true. Through
this platform, people are sending money to
their kids; companies are disbursing
salaries to their employees; people on daily
wages are being paid, etc. So, there are a
accounts must provide more value to

customers. Payments, savings, lending and
other advanced financial products are
much-needed.
Promoting Mobile Wallets
All BB players need to realise that operating behind walled gardens will not work
out in the long run. There is a need to
integrate and connect with the existing
infrastructure. For example, Easypaisa has
taken the lead to connect with 1-Link. We
now offer ATM cards to our customers
which can be used for cash withdrawal at
any ATM machine in Pakistan.
There is also a need to provide Retail
Payments, for which Easypaisa has already
rolled out a service where BB accountholders can purchase items directly from their
BB accounts from any Easypaisa agent
location. But the current processes are seen
as cumbersome and time-consuming, so
there is a continuous need to keep attempting better solutions for retail purchase.
Abrar has led the UBL Omnis retail

distribution network development
since the start. He has also led the
development and ongoing
improvements in an in-house
technology platform that enabled the
multichannel transaction capabilities
for Omni customers. Abrar holds a
bachelor's degree in Electronics
Engineering from UET, Lahore and an
MBA from the Illinois Institute of
Technology, Chicago.
variety of funding needs that are being
effectively served through this channel.
Challenges for a solo service provider
like Omni
UBL Omni has a telco-agnostic business
model, which means that the Omni users
have the freedom and flexibility to choose
the mobile service provider that best
meets their needs in terms of service, price
and location.
Continued on next page
Branchless banking transaction mix

Value Rs (bn)
Value of transactions Rs (bn)
Volume (mn)
250
60
200
50
150
100
50
40
1QFY14
30
4QFY13
20
3QFY13
10
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14
Total
Loan repayment, bulk payments and others
Bill Payments & Top-ups
Deposits & Withdrawals
Funds Transfer
2QFY13
1QFY13
4QFY12
3QFY12
Number of agents
2QFY12
120,000
1QFY12
100,000
80,000
60,000
50
100
150
200
250
Number of transactions (mn)
40,000
20,000
-
Loan repayment, bulk payments and others

Funds Transfer
Bill Payments & Top-ups
Deposits & Withdrawals
Composition of BB accounts (as of June 30, 2013)
1QFY14
Level 3
3QFY13
4QFY13
94,630
Level 2
2QFY13
26,897
Level 1
1QFY13
1,028,775
Level 0
1,492,639
4QFY12
3QFY12
Number of accounts (mn)
2QFY12
1QFY12
1QFY14
4QFY13
3QFY13
10
15
20
25
OTC volume mix

(Jul-Sep 2013)
2QFY13
1QFY13
4QFY12
3QFY12
P2P Fund Transfer
2QFY12
G2P Pensions and salaries
1QFY12
Withdrawal through G2P Cards

-
0.5
1.5
2.5
3.5
Deposits Rs (mn)
Loan repayments and others
M-wallet volume mix

(Jul-Sep 2013)
3,000
2,500
2,000
Fund Transfer
1,500
G2P Pensions and salaries
1,000
Cash Deposit in MW
500
-
Bills payment and Mobile top-ups
Cash withdrawal from MW

Adults with an account at a formal financial institution (%)

Pakistan
India
33
South Asia
Lower Middle Income

41
31
26
(countries average)
38
Adults with an account at a formal financial institution (%)

Pakistan
India
South Asia
44
34
41
Lower Middle Income
34
(countries average)
26
17
15
Bills payment and Mobile top-ups
3
Rural
Urban
Sources: SBP quarterly newsletters on Branchless Banking | Global Findex Database
Male
Female
25
23
Continued from previous page

The original concerns that many people
had were around UBLs capability and
capacity to build a retail agent distribution
structure as compared to the perceived
advantage of the telco service providers
who already had a massive distribution
footprint.
However, selling financial services is a
different line of business and requires a
different level of retailer engagement. As a
full-services bank, UBL was aware of the
level of engagement required to ensure the
provision of quality banking services
delivery from agent locations, which only
comes through retailer training and
education. Today, the industry with 6-7
active service providers boasts a sum total
agent network of over 100,000 retailers,
but a probable estimate of unique outlets is
just 30,000 to 35,000. Meanwhile, Omni is
available at over 15,000 active locations
and continues to grow its market share.
The key challenges that we face are
sector-related, which are common to all

service providers. They include expanding
the agent network, creating customer
awareness, and enriching the customer
experience. Being part of a large commercial bank has provided numerous benefits.
We were very particular about our internal
controls, risk management, and product
definition right from the very beginning.
That has enabled us to run the business in
a very controlled manner with an emphasis
on consumer service quality.
OTC: An unforeseen trap
Currently, the market is dominated by the
OTC money transfer business, which does
not offer the same features of BB account
services, such as higher transaction limits,
instantaneous ATM/Debit card issuance
from retail outlets, usage of countrywide
ATMs, mobile and SMS transaction
functionality and lower charges than OTC.
Thus, there is an unrealised opportunity for
Ghazanfar Azzam
President and CEO,

Waseela Microfinance Bank
Waseelas year-long experiences

A year after operations, our basic assumption that there is a large market of
unserved people for sending and receiving
money, paying utility bills, etc. stands
validated. Currently, Mobicash is handling 1
million transactions a month (mostly
urban-to-rural domestic transfers) worth a
total of Rs4 billion in transaction value. The
number of BB customers and volumes
have been picking up rapidly. We are
confident that in the long run, the growth
rate will be even faster as well be able to
use the synergies with Mobilink and
promote the usage of mobile wallets (or
m-wallets).
Our target market is those 100 million+
individuals who have a cell phone but no
bank account. We understand that
bringing them on board is the first step,
which has to be followed by the broadening of services menu. The channel is new
and therefore cannot handle very sophisticated financial products at this time.
Its a big market, and more number of
players will help the market in expanding
its outreach. After mobile operators,
commercial banks are also trying their
hand in this sector. It will be interesting to
see the competition in the sector.
We also understand the importance of
expanding our microfinance footprint as
much as our branchless banking network.
We have been able to position ourselves in
core micro business of small deposits and
consumers to benefit tremendously by

using BB accounts. In the last 2 years, UBL
Omni has been aggressively promoting
account proposition in its advertising,
customer communication and investment
in account product innovations.
Unfortunately, we as an industry have
fallen into a short-term revenue generation
trap whereby we have made our business
models OTC-centric at the expense of
accounts growth, the cost savings,
customer convenience and the long-term
benefits to industry. I am sure as the
business models mature, as consumers
become more demanding, and as new
products are rolled out, the market will
move away from being predominantly
OTC-centric.
The way forward
The future is extremely exciting and offers
huge opportunities to transform the retail,
G2P, B2B and C2B payments in Pakistan.
We are fortunate to have SBP as our

regulator in that they are extremely
forward-looking and work very closely with
the industry to support the evolution of
new business models around this
structure. However, one of the most critical
enablers for that revolution to happen will
be widespread availability of retail agent
locations that are providing these services
to customers across Pakistan.
It is about time that the industry agreed
on a code of conduct whereby the service
providers refrain from signing the same
shared agents. The industry needs to work
towards expanding the agent base, maybe
with selected geographies and interoperable networks. Multiple sharing of agents
results in liquidity and management
challenges at the retail location which
ultimately can translate into a poor
customer service.
Ghazanfar helped launch Waseela and Mobilinks joint BB

deployment, Mobicash in November 2012. He has previously
served as the President and CEO of Kashf Microfinance Bank. He
is an MBA from the University of Punjab, Lahore, and has attended
executive education and leadership programmes at LUMS, Penn
State University, and the Harvard Business School.
micro loans. The microfinance bank is

firmly established, with about 30
fully-functional branches, 5000 individual
borrowers and Rs180 million in loan
portfolio.
Challenges facing Mobicash
One of the main challenges is to manage
the large number of agents. Mobicash has
about 27,000 retail agents located all over
the country, a footprint we are targeting to
expand to 40,000 locations by the end of
this year. Now these outlets are the
simplest possible versions of bank
branches, but they are absolutely new to
the world of financial business. Its a
challenge for all the market players to
adequately train their agents to comply
with the BB regulations for functions like
money management and KYC, as well as
for consumer aspects like speed, quality
and delivery of the service.
Currently, we are catching up in terms of
building capacity and experience relative to
our competitors. Ultimately, its the people
that make the difference and drive business.
We are trying to keep the best possible
people in this venture. In terms of business,
in five years time, our ambition is to be the
market leader, which requires us to find a
way to surpass the challenges.
The OTC dilemma is a hard one
Agents are well-educated in the process of
registering m-wallets. But the dilemma is
that if an agent puts efforts into registering

m-wallet users (for which he is being
incentivised), he starts losing his OTCrelated commission and fees as the
sending customer is enabled to perform
transactions on his own instead of going to
the agent. We need to find a way to
surpass this challenge.
Another issue is that customers are not
aware of the benefits of usage of m-wallets.
Similarly the fact that the OTC channel is
neutral to both users and non-users of a
particular service provider is also fueling its
usage. In addition, receivers, which are
found more on the rural side, have natural
preference for OTC.
The reality is that OTC is serving well in
developing the market; its growing agent
business; and its convenient for low-income
end users. The SBP data shows that OTC
uptake is increasing every quarter, which
means that there is a need for it.
Migration to m-wallets
The m-wallet uptake is increasing, and the
number of their subscribers now exceeds
2.8 million. But this number is small
compared to the potential size of the
market. A lot more consultation has to take
place to promote m-wallet usage. The
regulator and the industry are trying to
encourage m-wallet usage. But there are
several impediments, including agent
incentivisation and customer awareness.
On our part, our ads are particularly
designed to make people aware of the

benefits of m-wallets. We are also coming
up with an ATM card for our m-wallet users
to give them an added incentive like a bank
account does.
But this is a challenge for the entire
industry and the regulator, because there
are other issues involved here. There are
many retailers who do not want to
document their transactions, meaning they
cannot partner with the BB service
providers for payment settlement. It will
take at least 5 years for a major shift
towards m-wallet adoption. Market players
would need to seriously invest more
money in technology and awareness
campaigns. Over in Bangladesh, there is a
good usage of m-wallet, thanks to the 50
million+ customer base of microfinance
banks. Therefore, growth of domestic
microfinance sector will also help.
BB services and the Payment Ecosystem
Its a question of connecting small and big
retailers to this payment platform. The
sooner outlets like small grocery stores and
vegetable shops are able to settle their
payments through this system; the better it
will be for m-wallet usage. Its also a
question of education and time. People will
get sensitised over time. We can take the
cue from the adoption of debit cards in
Pakistan. I foresee a time where any
institution which will remain out of this
payment platform will lose out.
Interviews by
Hammad Haider
e
l
i
b
o
k
M an
B
Improving mobile banking

growth prospects
Qasif Shahid and Shamsulhaq Niaz
Mobile banking takes banking relationship to a

whole new level. Customers get the convenience of banking from their homes, while
branches enjoy decongestion as they no longer
need to process low-value transactions and can
focus on better service to high-value customers.
As many as eleven commercial banks are
currently offering this service in Pakistan. The
commercial banks that are not offering mobile
phone banking are either in the process of
developing the channel or they are public sector
banks. Other banks sitting outside the mobile
phone banking market are doing so because
they are niche market players where the size and
nature of the customer base does not justify a
decent return on investment or they are simple
not protable enough.
Though still in its infancy, mobile phone
banking continues to see a healthy quarterly
growth. While the number of transactions from
1QFY11 to 1QFY14 has grown at a CAGR of 26
percent, the volume of transactions has grown
at a CAGR of 99 percent.
Part of this can be explained by ination
(particularly in utility bills), but it is also likely that
consumers have gained enough trust in the
system to carry out higher value transactions
through this channel. According to the central
banks Payment Systems Review of 1QFY14
transactions under this segment primarily fall
into payment of utility bills and account-toaccount funds transfer.
Aside from these two factors there are
three macro trends that are driving mobile
banking in Pakistan.
First, is the growing use of smartphones and
internet in the country. Smartphone penetration
is around 10 percent with feature phones
comprising 75 percent of all phones in the
country. Nowadays virtually every new phone
being sold is a smartphone; Chinese
smartphones are available in the market offering
an impressive array of features for very low prices.
Because of smartphones, internet connectivity is
also fast becoming a way of life for the ordinary
person. Most upscale or medium scale
supermarket/restaurant/public area offer Wi-Fi
hotspots. Besides, 3G network technology is also
expected to be rolled out this year. Soon, even the
most out of touch will be brought voluntarily or
otherwise into the connectivity fold.
The second factor is the growing importance
of Alternate Distribution Channels (ADCs) for
commercial banks. There is no debate on the

value of ADCs in the banking industry. Banks want
to stay in touch with their customers as much as
possible in a day, which is why over the years
weve seen branch timings increased to 5pm
(end even beyond) from 1pm. Similarly, the ATM
network is spread across the country. More so,
branded debit cards have now become virtually a
mandatory requirement for account holders.
The third driver has been the introduction of
Mobile Financial Services (branchless banking) by
mobile network operators (MNOs). There is
already a very high penetration of mobile phones
in the population and the MNOs are seeking
revenue growth from this Value-Added Service.
They have made phenomenal strides to global
acclaim and have blurred industry lines. Now any
mobile phone user can easily open a branchless
account with his/her service provider without
having to ll out lengthy forms and wait a few days.
The attention they have received is disquieting
banks because they need to offer something
above and beyond the branchless banking menu
to conventional banking customers.
A payment ecosystem
Currently, mobile banking primarily provides
relatively basic transactions and facilities to the
customers, such as balance inquiry, online funds
transfer, mobile top-ups and bill payments. Bill
payments are limited to utilities and cellular
post-paid bills, and are pretty much similar for
most of the banks. In the near future, the
direction we are likely to see is all the players
attempting to create payment ecosystems to
try and ring-fence their customers by keeping
their money within a closed loop. An example
could be of:
A bank offers salary accounts to the
employees of a corporate client A. These
employees receive their salaries and spend
them in various ways such as using their debit
cards to pay for groceries at a hypermarket
which is also a corporate customer. In turn, the
hypermarket would pay its supplier online
which happens to be corporate client A, thus
completing the loop.
To do that, a two-pronged approach will be
required. Firstly, alliances and loyalty programs
should be offered to the consumer. Secondly,
institutional solutions including salary
processing, cash management/collections, etc.
must be provided.
At the moment, the number of online billers is

very limited because it is cumbersome for banks
to bring each biller on board. Bringing them
onboard requires negotiations and drafting legal
agreements, which takes time in bureaucratic
environments. The way forward is through billing
aggregators third parties which sign up bulk
billers and merchants and provide a single
interface to the bank while handling the backend
processing. This is already happening, which is
why well be seeing non-utility billing options on
the menu such as train tickets, school fee
payment and later on, maybe even government
payments such as trafc violation nes, etc.
Digital Wallets
When MCB launched its mobile banking service
in 2009, we were one of the rst banks in the
industry. Till date, we have had over 10 million
transactions worth more than Rs40 billion
performed on our mobile banking platform. We
have used insights gained from our experiences
to develop a digital wallet the recently
launched MCB Lite in our bid to stay ahead of
the competition in the mobile payments space.
We believe digital wallets are the next big thing in
mobile payments and will drive the payments
landscape into a whole new stratum. Traditional
mobile banking is encumbered by the underlying
core banking systems. A digital wallet, on the
other hand, offers endless possibilities for
innovation in payments solutions because it
leverages mobile technology, social connectivity
and the power of cloud computing.
Awareness and nancial literacy

Lack of awareness is really what is keeping
customers from using mobile banking despite
the fact that a lot of time and money can be
saved through mobile banking. With todays
petrol prices, even a small trip to the bank can
cost more than a hundred rupees, so anyone
with the awareness would do the math and
choose to transact online given the opportunity.
However, we dont feel this is going to remain a
major issue as people are catching on fast and
whichever banks can go out and educate
consumers and offer the simplest or most
convenient solutions will be well positioned to
lead the market.
With smartphone usage on the rise, we expect
a lot of players developing mobile apps for
mobile banking. Such apps may offer improved
Mobile phone banking continues to see

healthy quarterly
growth. While the
number of transactions from 1QFY11 to
1QFY14 has grown at
a CAGR of 26%, the
volume of transactions has grown at a
CAGR of 99%.
interfaces for carrying out transactions and
offering various utilities such as GPS-based
loyalty programs, complaint logging/tracking,
directions to the nearest branch/ATM through
GPS, etc.
Technological limitations
Perhaps one of the greatest limitations for lack
of innovative products in mobile banking is
technological in nature, especially for banks.
Their legacy core banking platforms are rickety
and do not provide exibility or scalability. It is
very difcult and expensive to upgrade them or
to add innovative features to them. There is also
considerable cost involved with scaling up in
terms of manpower and infrastructure.
Banks can learn from the telecom industry in
Pakistan which has discovered that it makes more
economic sense to share infrastructure with
competitors. The policymakers might be able to
enable such thinking if they relax frameworks to
allow collaboration such as infrastructure sharing.
That will relieve the banks of the burden of
continuously upgrading and maintaining their
infrastructure and they will actually pay more
attention to innovation and design.
Despite these limitations, mobile banking has
outpaced internet banking. Internet banking has
been around since 2003, but mobile banking,
which was introduced around 2009, already has
more registered users (1.4 million vs. 1.3 million).
Though internet banking provides a richer
experience with more features, the trend is
explained by the fact that it requires users to
have email addresses while mobile banking
users are registered through their phones.
In the longer run, however, we feel that if
banks can drive uptake of mobile banking
successfully, this will create a second wave of
internet banking. It is important that banks
dont try to price transactions on both
channels, as this will do more harm than good
discouraging large scale uptake and not
generating much income.
The writers are members of the Digital

Banking team at MCB Bank Ltd.
Barclays:
Strategy by design
Shazad Dada
Barclays Bank
BR Research: What has been the overarching theme behind Barclays Pakistan?
Shazad Dada: Our clients and customers
are at the center of what we do. Across our
business, we are innovating and redesigning our services around them, while also
reaping the benefits of greater efficiency
and control. While this will be an ongoing
process, some of the results are already
apparent. If you look at the numbers, we
had realignment in 2012, intending to
refurbish and reshape our business, which
certainly has yielded good dividends.
We want to play our local and global
strengths and become the Go-To bank for
multinational and large local corporations,
financial institutions, high net-worth
individuals and development
organizations/foreign missions.
The year 2013 was a testament to our
value-driven strategys popularity where we
continued to take market share and with the
support of our clients, we have seen both
our deposits and assets grow steadily.
BRR: We have seen the administrative
expenses coming down by Rs750 million;
however, the topline seems to be suffering.
Why is that so?
SD: Its by design. We have leveraged our
products, capital, networks and expertise
to drive sustainable progress; however,
there were some clients who we cannot
service effectively. We have to pick our
ground in which to be competitive. We
decided to let go of some clientele
because of their domestic focus. Generally, they do not have FX or cash management needs, so we took a revenue shortfall
Shazad Dada joined Barclays Bank Pakistan as the Chief Executive Officer in October 2010,
with overall responsibility of managing all business operations in the region including
corporate and retail banking. He started his banking career in the USA, joining Bankers Trust
in 1990, which was acquired in 1999 by Deutsche Bank AG, before becoming Chief Country
Officer and Head of Global Banking Deutsche Bank. Prior to taking up his role with Barclays,
Shazad was a Managing Director in the Mergers, Acquisitions and Corporate Advisory
Group at Deutsche Bank Securities.
In this interview with BR Research Shazad, who is also the Chairman of Pakistan Banking
Association, talks about the banks strategy to increase advances, the pegging of deposit
rates to discount rate and his views on the draft Corporate Rehabilitation Act.
with the resulting greater cost reduction.

By concentrating on targeted segments
we are better able to provide a higher level
of service, understand clients needs in
greater depth and tailor products and
solutions accordingly. Working with one
large enterprise client on their financing
solutions can lead us to provide similar but
tailored solutions to other clients in the
same sector.
BRR: Do you plan on expanding your
branch network?
SD: Currently, we have no plans to
expand our branch network. Our existing
branches are state of the art in the design
and geographically well placed to our
targeted client needs with a capacity to
scale up if required. Furthermore, making
use of the technology we are working
towards branchless banking covering
geographies, which are required to
service our target clients.
BRR: Why have your advances stagnated?
SD: Our overall advances are stagnated,
compared to last year. However, if we go into
details, the advances to our existing clients
have actually increased. As I mentioned
earlier, it is by design that we have exited
some non-core relationship which caused a
decline, but that was offset by an increase in
advances to our target clients.
BRR: Do you see your ADR getting higher
than IDR anytime soon?
SD: Mostly likely yes. Our clients are again
in an expansionary mode and trade
volumes are likely to be higher. Both of

these key indicators suggest that our
advances should increase in 2014.
BRR: What are your views on opportunity
for Pakistani businesses in Africa?
SD: For many exporters Africa is the final
frontier. The vast and diverse nature of the
continent and its people makes trading
with Africa seem simply too much of a
challenge. However, the infrastructure
across many of Africas largest economies
is improving rapidly and I encourage all
Pakistani businesses to view Africa as a fast
growing new market to be explored.
With more than 50,000 employees on
the ground in Africa, we know very well the
challenges that businesses face, but also
the success stories of so many of our
clients who have started business relations
with African companies. This is the ground
floor for many African economies, in which
Pakistani exporters have the opportunity to
build their brand in Africa at a time when a
growing middle class is beginning to make
long term brand decisions. Pakistan should
not be missing out.
BRR: Being the Chairman of PBA, what are
your views on the State Banks decision to
peg deposit rate with discount rate?
SD: By pegging the deposit rate to
discount rate, the spreads have been fixed,
with the result that banking sector cost of
deposit has increased, however, varying
between banks.
The hardest hit category is basic saving
accounts which are generally in Pakistan
used as normal transaction accounts with
all the features of checking accounts.

Therefore by capping the saving account
spreads and considering the cost associated in servicing these accounts the
deposits become very expensive.
Personally, I believe banks should have
the freedom to determine their own rates
based on their cost structure and funding
requirements. In a free market depositors
should be the ultimate winners.
BRR: Has there been any progress with the
Corporate Rehabilitation Act after the
recent meeting with the SECP?
SD: The banking community is clearly in
favour of enhancing the current law or
enact a new law that provides interim
relief to debtors in case of genuine
challenges they may face in meeting their
financial commitments.
Having said that, we are also concerned
if the act is not drafted properly, it will be
misused by willful defaulters and cause an
increase in NPLs. As for the draft of
Corporate Rehabilitation Act, which was
initiated in 2008, banks reviewed the draft
individually, and through the platform of
PBA proposed certain changes in the draft
act. These suggestions are yet to be
incorporated in the draft, and based on the
recent feedback from all the stakeholders,
it has been indicated that the SECP is
reviewing the draft act afresh.
Interview by
Ali Khizar and Zuhair Abbasi
Citibank N.A. cautiously

optimistic about Pakistan
Nadeem Lodhi
Country Manager and Managing Director, Citibank N.A.

Meet Nadeem Lodhi, who rejoined Citibank N.A Pakistan as its Country Manager and
Managing Director in 2012. Prior to that, Nadeem was associated with Abraaj Capital where
he was heading the business for sub-Saharan Africa. During his earlier tenure at Citi,
Nadeem held various roles in Pakistan and Africa including the CEO for Uganda.
Below is the edited transcript of a recent sit- down with BR Research.
Nadeem kicks off the discussion by

explaining the business strategy of the
bank. Globally, Citibank N.A. classifies
its banking business into two major
domains: consumer banking and institutional banking. The institutional business
of the bank primarily comprises treasury
& trade services, advisory & investment
banking and corporate banking, which
forms the core essence of Citis operations worldwide.
He explains that the bank remains at the
forefront of taking clients in Pakistan to
international capital markets and introducing new products from other geographies
by adapting them to local needs.
Recalling Citis feats, Nadeem says that
fundamentally, Citi Pakistan is now a
wholesale bank serving its corporate and
institutional clients all their other
offerings are designed to facilitate the
delivery of services to such clients. Some
of our most significant transactions include
Government of Pakistans first foreign
currency Sukuk, first local currency Sukuk,
first oil hedge in Pakistan and so on. We
have also been involved with the government as Joint Arranger on three Eurobond
issues in 2005, 2006 and 2007 and the
OGDCL GDR issue in 2005.
He emphasizes on how Citis business
model is different from other banks
operating in Pakistan and also explains the
rationale behind the banks limited market
presence - having just three corporate
branches in the country.
Citis primary focus is to serve top tier
Pakistani corporates and public sector
entities as well as MNC clients present in
various locations across the globe with
heavy presence in the country. In Pakistan
we are uniquely positioned with a
well-entrenched franchise and continue to
successfully deliver value-added solutions

to this niche client base from areas of
structured financing, M&A advisory,
electronic payment solutions, export credit
agency supported financing, working
capital management and risk management.
Just to give you an example, we handle
over 50 percent of the total MNC trade
volume in the country, he said.
Some of the most recent and significant
achievements of Citi include, jointly
arranging $130 million syndicated foreign
currency Islamic facility for Pakistan
International Airline (PIA) in October 2013
which was the second biggest transaction
in the last 2 years. The bank also arranged
$70 million FMO & OPIC supported
financing for Pakistan Mobile Communication Limited (Mobilink) in 2012.
On the investment banking front, the
bank holds a leading position in the
market. Weve recently advised Unilever
on share buy-back of Unilever Pakistan and
delisting from the Pakistani exchanges
which contributed to be the single largest
FDI in the recent history of Pakistan. The
bank also advised on AkzoNobel's sale of
its controlling stake in ICI Pakistan, and
acquisition of 35 percent stake of Pakistan
International Container Terminal by ICTSI.
Among all the categories of institutional
banking, Lodhi terms trade and cash
business to be the anchor of the banks
business and the single most important
area that pours in flow into the bank, while
on the treasury front, Citi also provides
hedging and derivative to its clients
besides FX sales.
As part of its commitment to the
country, Citibank N.A. has been conducting road shows since last year to showcase the potential of the Pakistani market.
In collaboration with the US State Depart-
ment, the bank also hosted an investment

conference in Dubai in June last year,
providing an opportunity to Pakistani
companies to highlight the multiple
opportunities available in the country to
US investors.
The bank is already Basel-III compliant
while other banks are likely to achieve the
same level in 2018, as per the plan
chalked out by the regulator. Furthermore, Citi is pioneering efforts to implement state-of-the-art technological
systems in line with a regulatory push to
automate banks operations.
Commenting on the banking float,
which is the duplicate money present in
the banking system between the time
when a deposit is made and when the
funds become available in an account,
Nadeem says that the State Bank of
Pakistan wants to reduce the banking float,
which could be achieved through a
technology engine called Real-Time Gross
Settlement (RTGS). Citibank N.A. is
expected to be the first bank automated on
RTGS with the SBP in the first quarter of
CY14.
When asked about the economic
backdrop, Lodhi said the bank remains
bullish about the Pakistani market in the
CY14. Our niche clientele, mainly MNCs,
consider Pakistan to be in their top ten
growth markets. If they do well, it reflects
positively on our performance,
comments Lodhi.
He believes that the energy sector is the
key area that will turn around economic
growth in the coming years and bring a
revival in the fiscal system. The decision
to tackle the three Es [energy, economy
and extremism] is the correct formula
employed by the government and will
bear fruits soon.
Weve recently advised

Unilever on share
buy-back of Unilever
Pakistan and delisting
from the Pakistani
exchanges which
contributed to be the
single largest FDI in the
recent history of
Pakistan.
Interview by
Zuhair Abbasi & Sobia Saleem
Agri lending
Javeria Ansar
There is perhaps no need to argue that

agriculture is one of the most important sectors
of the economy and, therefore, requires
frequent pats on the backs and incentives such
as priority on the lending roster. However, like
most developing economies, Pakistan's rural
credit market has the usual suspects in store:
co-existence of formal, semi-formal and
informal lenders and a weak regulatory
framework that bogs down more than it enables.
However from the face of it, things have been
rapidly improving. The State Bank of Pakistan had
set the agriculture loan disbursement target at
Rs360 billion for scal year 2014, following which
the banks disbursed Rs159.3 billion or 44
percent of the annual target - in the six months
ending December 2013. The outstanding portfolio
of agri loans also surged by 17.3 percent to Rs
276.7 billion at end of December 2013.
A lot of that can be credited to the inclusion
of the private sector into the lending mix. With
the induction of 14 domestic private banks into
the agricultural credit scheme in 2002 and the
removal of mandatory credit targets for big ve
banks from 2005, the share of commercial
banks has shown signicant rise in the overall
agri credit disbursement.
Conversely, the share of specialized banks,
namely ZTBL & PPCBL, in agricultural credit has
declined from 73 percent in FY01 to 26 percent in
FY13. The trend also shows that while commercial
banks are continuously surpassing their indicative
credit targets, the like of ZTBL, which only
managed to extend Rs23.7 billion at the close of
the rst half against its annual target of Rs70
billion, have started to lag behind conspicuously.
Segmentation and collateral: still

some way to go!
Money lent for agriculture is still widely being
used for purchase of urban properties and
expensive cars, a fact alluded to by almost
every banker this scribe talked to during initial
research on the subject.
Supply of agri credit by institution

5 big CBs
ZTBL
DPBs
PPCBL
MFBs
Rs Bn
180
160
140
120
100
80
60
40
20
0
-20
FY08
FY09
FY10
FY11
FY12
FY13
Source: SBP
Additionally gross irregularities are also visible in

other avenues. Recall that the State Bank of
Pakistan introduced rules for mandatory
insurance of total credit extended to farmers and
also promised to reimburse premium pertaining
to subsistence level farmers visible across the
board. However, a majority of the amounts
extended remain uninsured and even if the losses
are indemnied by insurers, corporations like
National Insurance Corporation, consistently fail
to make timely payments.
Furthermore, an enquiry into a break-down of
credit extension to farm household also reveals
anomalies. According to calculations computed
from the latest Agriculture Census of 2010,
households with large operational holding (more
than 25 acres), who make less than one percent of
the total borrowers, obtained 73 percent of total
credit exclusively from formal sources.
In contrast, households with operational
holdings under 5 acres, which constitute 65
percent of the total farming households in the
country, received only 31 percent of loan
extended by formal sources. Additionally,
subsistence farmers, comprising 35 percent of

borrowing households as per the census, got
only 18 percent of their total loans from formal
sources during the same time.
Of those that relied exclusively on informal
sources 31 percent were subsistence farmers and
25 percent were landless households, which
means that the highest proportions of those who
can be categorized as the poorest households still
depend exclusively on informal sources.
One of the reasons often cited to explain
away this skewed disbursement of credit is the
inability of small and tenant farmers to provide
acceptable collateral.
However, some headway has been recently made
to remedy the situation. The assessment of the
value of the land for collateral, are now computed
on the basis of the 3-year averages of the value of
land mutations in the area, according to the
government land record. This has helped slightly
ease a major impediment to the proper assessment of the value of the collateral.
Nonetheless, the State Bank still needs to
look into this area and rationalise the loan and
Agriculutre credit by source and farm size

Size of farm (Acres)
Farm household total

Under 1 acre
1.0 to under 2.5
2.5 to under 5.0
5.0 to under 7.5
7.5 to under 12.5
12.5 to under 25.0
25.0 to under 50.0
50.0 to under 100.0
100.0 to under 150.0
150.0 and above
Total households
under agricultural
debt
Z.T.B.P
11769
C.B's
50885
MFI's
29157
NGO's
15703
Commission agents
230502
Friends & Relatives

493382
75,084
237762
225783
174993
164723
119656
58050
19536
3185
3154
11,769
43644
70362
69014
73321
63447
34088
12945
2043
1699
1,782
6798
9373
7989
8529
8192
4594
2413
588
624
2,024
7059
8050
3709
4704
2260
951
316
34
49
1,071
3721
3182
3162
2142
1688
618
86
4
35
7,898
51007
51161
39936
35250
26972
13010
3896
654
700
53,594
145900
107712
69889
7227
3270
1377
536
21
36
Amendments in indicative
credit limit and eligible items
for Agri-nancing
State Bank of Pakistan has very recently
enhanced per acre limits for major and
minor crops, orchards and forestry.
According to revised report on Indicative
Credit Limits & List of Eligible Items for Agri
Financing released in early 2014, nancing
limits per acre for rice, wheat, cotton and
sugarcane have been increased to Rs
34,000, Rs 29,000, Rs 39,000 and Rs
53,000, respectively from existing limits of
Rs 19,000, Rs 16,000, Rs 21,000 and Rs
30,000 xed in 2008.
The bank has also re-developed working
tables for assessment of per acre credit for
each crop, which may be used by eld
ofcers in case of variation in limits rather
than indicative lending limits.
Per acre use of fertilizers for major crops
and orchards has been updated.
Size/Classication wise number of farms as
percentage of total number of farms in
province has also been re-dened.
List of eligible items for agri. nancing has
been updated.
Source of credit
10181907
Source: Agriculture Census 2010
collateral ratio so that more nancing institutions can take up the cause.
But to give credit where it is due, the SBP has
recently been on a bit of an agri bender, having
made amendments to the prudential regulations, indicative credit limits and the list of
items eligible for agri credit earlier this year.
Some of the important revisions to the
regulations are highlighted in the enclosed box.
However, clearly enough, the increased level
of agricultural lending alone cannot raise the
farm productivity and contribute to the
national economy if bottlenecks like water
efciency, land record management, proper
marketing and storage, adoption of modern
techniques, mechanization and other agri
innovations and efcient use of extension
services are not addressed.
Total cash and credit requirements for

seeds, fertilizers, and pesticides for
medium and large farms are revised to 80
percent and 60 percent, respectively,
compared to 70 and 50 percent in the
previous report.
The writer works as

Research Analyst at
Business Recorder.
javeriaansar08@gmail.com
Pishin
Sherani*
BALOCHISTAN
Zhob
Killa Abdullah
Ziarat
Quetta
Chitral
Musakhel
Killa Saifullah
Loralai
Mastung
Upper
Dir
Barkhan
Sibi
Kohlu
Nushki
Kachi
Kalat
Chagai
Malakand
Dera Bugti
Hangu Kohat
Khuzdar
Kashmore
Shikarpur
Ghotki
Kambar
Shahdadkot
Sukkur
Dadu
Khairpur
d
hee bad
Shanazira
Be
Latest district wise demarcation has

been sought while locating bank
branches, but lack of availability of
accurate data on newly created
districts led to their inclusion within
the former boundaries. These
exceptions include:
Harnai, Balochistan: carved out of
Sibi district in August, 2007
Torghar, KPK: carved out of
Mansehra district in January, 2011
Lehri, Balochistan: carved out of
Nasirabad district in May, 2013
Sohbatpur, Balochistan: carved out
of Jafarabad district in May, 2013
Sujawal, Sindh: carved out of Thatta
district in October, 2013
Attock
Hyderabad
Umerkot
wal
Khanewal Sahi
Vehari
Lodhran
Thatta
Mirpurkhas
Tando
Muhammad
Khan
Tharparkar
Ra
jan
pu
r
Badin
Rahim
Yar Khan
Gujrat
Mandi Bahauddin
Narowal
Gujranwala
Hafizabad
Sheikhupura
Lahore
iot
Chin
Jhang
Karachi
lum
Jhe
Sargodha
Bhakkar
Dera
Ghazi
Khan
Rawalpindi
Sialkot
Khushab
Layyah
Jamshoro
PUNJAB
Chakwal
Mianwali
Sanghar
Matiari
remain unidentified in terms of district

due to lack of clarity over tehsil/council/
village name. Branch locations for AJK,
FATA and Gilgit-Baltistan have been
identified, but are excluded from mapping
for the sake of consistency in comparison
with other provinces.
District classification: Boundaries of
several districts have been redrawn since
the year 2000, with new districts created
at different stages. Outside FATA and
Gilgit-Baltistan, the total number of
districts in the country is 118, including
the four provinces and the Islamabad
Capital Territory.
obtained from State Bank of Pakistans

annual publication called Banking Statistics
of Pakistan for the fiscal year ended June,
2012. We thank Free and Fair Elections
Network (FAFEN) for providing us the latest
district-wise population estimates (as of
June 2013), which in turn was obtained
from Election Commission of Pakistan.
Bank selection: The branches of all
scheduled commercial banks with retail
operations were included. Accordingly,
for the sake of consistency, foreign
banks, DFIs and micro-finance banks
have been excluded.
Unidentified branches: 223 or 2.3
percent (of 9,792) branch locations
Fa
isa
lab
ad
These maps show district wise bank

branch density in the country. The density
is presented as number of people
serviced per branch in each district (See
legend). The maps highlight a clear
demarcation of districts that remain
under-banked relative to others. The
disparity is visible both inter-provincially
as well as within each province.
Although maximum accuracy was sought
during this exercise, readers are advised to
note the qualifications stated below. In our
opinion, however, these qualifications do not
distort the overall picture.
Difference in dates: Data pertaining to
the location of bank branches have been
Bahawalpur
Bah
awa
lnag
ar
SINDH
Tando Allahyar
Dera
Ismail
Khan
Lasbela
Jacobabad
KHYBER
PAKHTUNKHWA
Tank
Islamabad
Awaran
Mapping the
disparity in
bank branch
network
across
Pakistan
Naushahro
Firoze
Karak
Bannu
Lakki
Marwat
Gwadar
Larkana
Jhal Magsi
Panjgur
Kech
Abbottabad
Swabi
Haripur
Nowshera
Peshawar
Jafarabad
Kharan
Washuk
Shangla
Battagram
Buner Mansehra
Mardan
Charsadda
Nasirabad
*No bank
branches were
identified in SBP
statistics for
Sherani district,
Balochistan.
Lower
Dir
Kohistan
Swat
NankanaSahib
Kasur
TobaTek Singh
Okara
Pakpattan
Multan
The
LEGEND
The legend depicts the

number of people
served per branch
where population
estimates have been
taken as a proxy.
Muzaffargarh
1 - 9,999
10,000 - 19,999
20,000 - 29,999
30,000 - 30,999
40,000 - 49,999
50,000 - 4,999
75,000 - 9,999
100,000 and above
Bank of Punjab:
eyeing the unbanked
Naeemuddin
Khan
President and
Bank of Punjab
Naeemuddin Khan has been serving the Bank of Punjab as its President & CEO since Sept
2008. He started his banking career in ANZ Grindlays Bank in 1978 and over the last 35 years
has amassed a wealth of diversified banking experience. He has also previously served as a
member banking on the Corporate & Industrial Restructuring Corporation (CIRC), where he
was responsible for the recoveries of the NPLs of over Rs142 Billion.
BR Research recently sat down with the gentleman to talk about BOPs journey through the
troubled waters it had landed in and his vision and firm hand that has guided the bank back
onto the right course.
Following is a brief transcript of the conversation that took place during the meeting.
The conversation took off from the

problems inherited by the new management. From poor asset quality to deposit
withdrawal and high cost of funds, the
bank had suffered from a complete range
of problems that came in a variety of
shapes and sizes. But the banks new
management has managed to turn the
situation around.
Khan tells us that non-performing loans
has come down to Rs65 billion from Rs80
billion in FY10. He adds that Rs3.6 billion
has been recovered from Harris Group,
whereas 1,912 recovery suites against
defaulters have been filed by the new
management.
The massive deposit withdrawal of Rs50
billion to due to negative market perception has also reversed to a point that the
deposits rose to about Rs295 billion from
Rs164 billion in 2008. Even the cost of
funds has dropped to 7.15 percent from
nearly 11 percent booked earlier.
The bank has also improved on its
investments side. Khan says that at the
close of FY13 the banks investments
stood at Rs136 billion, up from Rs25.7
billion in 2008 with an improved mix. In
2008, 53 percent of investments were in
illiquid mutual funds, now 94 percent of
investments are in government securities.
As a result of these efforts, the banks
bottomline went from pre-tax loss of
Rs16.8 billion in 2008 to a modest pre-tax
profit of Rs523 million in 2011 and Rs1.54
billion for the six months ending June
2013. Total assets grew from Rs143.5
billion in 2008 to Rs329.4 billion at the
end of FY13.
Bad debt management
Going to back to discussion on bad debts

Khan said that our infection ratio has
already gone down; the SBP had given us a
target of reducing these by 4-5 percent each
quarter and we are easily exceeding that.

Going forward we are planning on increasing our lending in a massive way, which will
make the mammoth task a little easier.
He added that the bank has already
recovered around Rs35 billion whereas we
are also expected to see massive reversals. Additionally, we have foreclosed
assets of around Rs12 billion from defaulters properties - landholdings, machinery,
and other assets. Every 15 days we have an
auction and sell them off. So weve already
recovered more than a billion rupees from
these auctions in lieu of cash.
Sharing the details of the Haris Steel
transaction, Khan said that they are making
good progress on that front as well. Aside
from the recovery of around Rs3.6 billion,
there is an ongoing litigation in UAE as
well and AED52 million is at stake there. In
Malaysia we have virtually auctioned off all
of Harris Steels assets - all their country
homes and cars and we expect around a
billion rupees from that coming in by the
end of this year.
While these positive developments, the
difficult cases are still with the banking
courts and NAB. NAB has been extremely
ineffective over the last year but we have
higher hopes with the new head. We have
filed nearly 2,500 cases in courts and we
have not spared anyone - not even the
highest and the mightiest. But the ball now
is in the judiciarys court. Depends on how
quickly they make decisions, he said.
He stressed that all institutions can turn
around in Pakistan if you put in the right
people in the right place. The biggest
things keeping us behind are our own laws.
And with all due respect, our judiciary
needs to improve and the banking courts
need to step up their game.
In another 5 years we aim to resolve 80
percent of our bad debts, but this time
would have been cut in half had the courts
been more active. Additionally sometime

we also feel handcuffed by the government and cant make some aggressive
moves because youre afraid that it will be
perceived as crony-ism or corruption.
Growth avenues
Pointing to the success of banks

consumer side, Khan highlighted that
Bank of Punjab is the biggest lender in
Pakistan in car financing. Contrary to
popular perception, weve had a very,
very successful yellow taxi scheme, with a
98 percent recovery rate. The scheme
might have been politically motivated but
we fought a lot to make it bankable. They
came to us with a wish list but we handed
them our own bucket list of requirements
right back. We made sure that every car
had a tracker, and that is what has helped
with the recovery rate. As soon as 180
days pass, we recover the vehicle and
auction it off.
Khan adds that the bank has all major
corporate on its lending books, which
wasnt the case before. We are a growth
oriented bank; we want to grow on both
the asset and liability side. We want to
bring our cost of funds down and are now
well in control of the situation.
The bank also plans to expand its
Islamic footprint as a part of its growth
strategy. Weve already launched our
Islamic banking segment with four
branches, and have crossed a billion
rupee deposit. We also have Islamic
financing proposals for around Rs1.5
billion lying with us, but deposits are low
so our commercial banking side will
subsidize what the shortfall rest for the
time being, he said.
He added that the bank has asked for
another 14 branches to be opened next
year. We expect a bright future,
especially in great stretches of unbanked
areas in the KPK where there is a lot of

demand for deposit and even the smallest
of branches offering Islamic banking have
low cost deposits of Rs2-2.5 billion lying
with them.
When asked about any plans to acquire
a bank in the medium term to help with
expansion, Khan said that he had
proposed to the board that Bank of Punjab
should buy HSBC. But the government
said no, forget it.
While he says that he would be open to
a good proposal, he doesnt feel that
there are enough good buys in the market
at the moment. If we open 40-50
branches per year, we dont need really
any mergers. The one edge that we have
is the government of Punjabs very strong
backing, so I think we should be good for
the time being.
Khan says there are still so many
unbanked places that we need to tap. As

the Bank of Punjab, we intend to expand
aggressively across the smaller market
towns and cities across the province places where all that low cost money is
lying around and there are very few banks.
Places like Deepaal pur, Ghaziabad, and
Siadpur - just to name a few, where potato
and fruit and what-not farmers are sitting
doing big money transactions with no
banks for miles. So thats where we are
going now. Well be trying to take up
concentration in smaller towns and open
smart efficient branches in extremely
targeted locations next year.
Interview by
Ali Khizar & Javeria Ansar
Sindh Bank no longer

provincial in character
Bilal Sheikh
President and Chief Executive Officer, Sindh Bank

Bilal Sheikh assumed the charge of President & CEO of Sindh Bank in November 2010. Sheikh is a seasoned banker with
over 45 years of diversified experience in banking. His last assignment before joining Sindh Bank Limited was that of
President & Chief Executive Officer, Mybank Limited. Prior to that, he served as President & CEO, PICIC Commercial
Bank Ltd, Chairman National Development Finance Corporation (NDFC) and Deputy Managing Director PICIC Limited.
Below are the edited transcripts.
Sindh Bank has grown fast. Like really fast.

Following the permission to commence
full-fledged business in April 2011 when it
had only one branch, as of December
2013 the bank had expanded its network
to 200 branches spread over 104 cities,
towns and villages across all the four
provinces and Azad Jammu & Kashmir.
Commenting on this performance, Sheikh
says that this is an all-time record as no other
scheduled commercial bank has grown with
such a speed. However, he adds, now the
bank plans to consolidate and during the
current year, only 25 Branches including 5
dedicated Islamic banking branches will be
added to the network.
But the bank has not grown in terms of
branch coverage alone. Sheikh highlights
how Sindh Bank has demonstrated
amazing results in all key performance
areas. By December 2013, its deposits
stood at Rs46 billon with Government of
Sindhs deposits of Rs8 billion and the
remaining 83 percent of the deposits
being placed by corporate sector and
general public. This speaks of volumes of
trust and confidence reposed by the
general public in Sindh Bank, he says.
Sheikh expresses the hope that in the
times to come, the share of government
deposits will reduce as branches will be
able to generate more deposits locally.
Islamic banking branches would also
become functional during second half of
the current year and the growth would
gain further momentum achieving a
deposit base of Rs65 billion by December,
2014, he says.
Commenting on advances, Sheikh says
that lessons from the experience of banks
and DFIs he had served and the industry at
large, Sindh Bank has adopted a cautious
approach towards lending. Its board has
taken a policy decision not to extend

long-term loans on stand-alone basis. The
bank, however, has been participating in
syndicated loans according to its size and
risk appetite, thus sharing risks and rewards
with the syndicate.
He adds that working capital financing
is being allowed on secured basis, mostly
against pledge of commodities with
guaranteed annual clean up. Other than
pledge, such working capital loans were
secured by mortgage of properties
located in up-scale areas of DHA, Clifton,
and KDA & CDA with minimum risk of fake
titles and price fluctuation, he said.
This policy, according to Sheikh, had
proved very successful and during the first
three years, there were no bad loans requiring
classification or provisioning. Thus Sindh
Bank could claim to be the only commercial
bank of the country with zero NPLs.
By December 2013, Sheikh said the
banks advances stood at Rs27 billion
including Rs5 billion given to the Government of Sindh for procurement of wheat
under commodity operations programme
guaranteed by the federal government.
Like deposits, the ratio of advances to
private-public sector was also calculated
as 83:17. Sheikh hopes that the banks
advances will grow to Rs40 billion by the
end of current calendar year.
Coming to the bottomline, Sheikh
highlight that from the very inception,
Sindh Bank has been showing profit and
during the first three years of operations
ending December 2013, the cumulative
profit was over Rs3 billion. This too, claims
Sheikh is a record as no other bank, be in
public or private sector, has earned this
much profit during its infancy.
Sheikh is confident to earn much higher
profits in days to come as branches opened
during 2013 will be able to generate enough

deposits to offset the expenses incurred on
their establishment and also the recurring
ones. The economy is also moving in right
direction and the private sectors demand
for credit is on the rise. Moreover, the bank
is diversifying its credit portfolio by enlisting
more remunerative new relationships
engaged in power, fuel, construction and
beverage businesses.
Although increase in the discount rate had
off-set the mandatory higher rate of return
on saving deposits, to augment its income
stream, the bank is focusing on fee based
exchange business, says Sheikh.
Sheikh says that being a wholly owned
government bank, Sindh Bank is quite
zealously allowing agricultural loans in all
forms like production loans, tractor loans,
growers loans and non-farm loans for
dairy, livestock and poultry, etc.
Another item in Sindh Banks list of firsts
is the fact that it is the only bank which had
surpassed its annual disbursement target
within the first six months of the financial
year 2013-14. In addition to its core
business, Sindh Bank is also an active
participant of Benazir Income Support
Program. It is offering free of cost services
to Hajj pilgrims. Lately, Sindh Government
has appointed the bank as the executing
agency for granting loans for revival of sick
industrial units of rural Sindh.
Moreover, prompted by the success
story of Sindh Bank, the Government of
Sindh decided to launch three more
companies in the financial sector, i.e.
Sindh Leasing Company Ltd., Sindh
Modaraba Management Ltd. and Sindh
Insurance Ltd.
Islamic banking
branches would also
become functional
during second half of
the current year and the
growth would gain
further momentum
achieving a deposit
base of Rs65 billion by
December, 2014
Interview by
Ali Khizar & Sobia Saleem
Impediments to building
a stronger bond market
Abdul Rehman Warraich
The future of
national
development
depends on higher
devolution and
enabling city/district
governments to
raise money from
capital markets and
invest it in
infrastructure
projects.
It is a sad reality that bond market in Pakistan has

not been able to evolve as a vibrant, sizeable and
liquid market that can serve as an engine of
economic growth for the country. The size of
Pakistans bond market - measured as percentage of GDP - dwarfs in comparison to its money
market. This article surveys a host of reasons
behind the inadequacy of bond markets.
One of the main impediments to growth and
development of bond market is high volatility in
ination and interest rates, which discourages
borrowers and lenders from taking a long-term
view on the economy and making long-term
decisions/commitments.
Investors in xed rate bonds feel betrayed if
ination and interest rates increase signicantly over short periods of time. Even in the
case of oating rates on private sector bonds,
investors may be seriously discouraged if sharp
increases in ination and interest rates result in
defaults by businesses. Memories from the
large scale defaults in 2008 and 2009 are still
afresh in the mind of investors.
Bond investors also typically feel more
vulnerable as the collaterals underlying the
private sector bonds are usually weak and the
number of investors in long-term bonds is
usually quite large. In case of default by the
issuer, coordination and agreement between
the lenders is difcult to achieve.
In order to mitigate some of these predicaments, Pakistan needs to start targeting
ination. Ination targeting has become a
widely accepted policy throughout the world as
it provides an anchor to all market participants
including savers, intermediaries and spenders
and allows them to make long-term saving and
investment decisions with greater condence.
On that note, the government should also grant
autonomy to the central bank in order for it to
stick to the target.
Institutional void
The writer works as Chief

Investment Ofcer at UBL
Fund Manager. His views do
not necessarily represent
those of his organization.
The second stumbling block in the development of the bond market is the shortage of
institutions that have a genuine need for
investment in bonds.
Given longer maturity and higher risk of bonds,
only investors with long-term horizons and/or
higher risk tolerances can potentially invest in
bonds. Such investors mainly include DFIs,
pension funds, insurance companies and a few
categories of mutual funds.
The trouble is that due to various reasons,
the growth of these institutions and their
demand for bonds has remained limited. For
instance, DFIs have been unable to raise
long-term funds at competitive rates. Similarly,
public sector pension funds are unfunded in
most cases and therefore, unable to invest in
bonds. Those in the private sector have been
mostly converted into Dened Contribution
Plans which do not use an asset-liability
management framework to manage their
assets. These plans are being managed on the
basis of an asset-only philosophy which, based
on their low risk tolerance, leads to a low

allocation to bonds.
In this vein, it is pertinent to highlight that the
biggest pension liabilities are owed by the
government itself but there is no explicit policy
to fund the pension plans of federal, provincial
and district governments most of which are
managed on a pay-go basis i.e. the pension
liabilities are paid out of taxes. This has not only
resulted in poor nancial management but has
also deprived the capital markets of precious
money that could be invested in long-term
bonds. Federal, provincial and district
governments must adopt explicit funding
targets for their pension plans.
Even in case of public or private sector
entities with partially or fully funded dened
benet pension plans, professional management, that can understand and apply the
concept of asset-liability management to the
investment portfolios, is mostly absent. As a
result, their pension plans investment
portfolios have much smaller exposures to
long-term bonds.
A related part of the problem lies in
inadequate insurance sector. Pakistan has one
of the lowest insurance penetration in the
world. Low per capita income and lack of an
insurance culture, partly due to strong religious
beliefs, have been major impediments to the
development of insurance sector. With the
advent of Takaful, however, it can be expected
that the industry may grow at a higher rate in
future. Still, the government needs to adopt
explicit policies to promote a culture of
insurance in the country. This may include
compulsory motor vehicle insurance and life
insurance by all individuals earning income
above a certain threshold. Income tax rebates
recently granted to individuals on payment of
life insurance premiums are a welcome
development. Tax rebates may also be offered
to insurance/Takaful companies for creating
awareness regarding the benets of insurance
through print and electronic media.
Mortgage bond market

Despite the fact that housing and commercial
construction sector has immense potential to
jump start Pakistans GDP growth at a high rate for
a long period of time, a robust nancial system to
support this sector is missing from action.
Such a nancial system would consist of
banks and housing nance companies on the
one hand, which issue mortgage loans and, on
the other hand, of mortgage companies which
raise money from the market through
mortgage bonds and invest the money raised
through such bonds in mortgage loans.
This will enable the banks and housing nance
companies to convert their long-term illiquid
assets (mortgage loans) into cash by selling
those loans and relend that money for new
construction projects. The mortgage companies
will buy those mortgage loans with the money
borrowed from individuals and corporate
entities. This system will also help to channel the

savings of individuals and corporates into
housing and construction sector.
To achieve this end, there is a need to
develop mortgage market. Federal and
provincial governments should develop the
legal framework to encourage/establish
business entities that issue mortgage backed
securities and invest the money raised through
such securities in mortgage loans. This model
has been successfully used by the US for many
decades though of course lessons should be
learnt from the 2008 crisis to ensure that we
only adopt the good aspects of the model.
Munis, Munis
Pakistan does not have a market for infrastructure
bonds using which federal, provincial or local
governments can borrow for specic purpose of
investment in infrastructure projects. Such
projects are designed in a way that they can earn
enough money over their lifetime to earn an
attractive return on investment required to
establish and run those projects.
Federal government should adopt an explicit
policy that borrowings through long-term
bonds will only be utilised to nance infrastructure projects. This will ensure that the money
raised through long-term bonds will not be
spent on short-term expenses and will
contribute to higher future GDP growth and
employment generation.
The future of national development depends
on higher devolution and enabling city/district
governments to raise money from capital
markets and invest it in infrastructure projects.
This requires making requisite amendments in
federal and provincial laws relating to the
nancial powers of local governments.
It may take a few years to build the capacity
of local government and to create the
institutions for effective oversight of the
nancial activities of local governments but it
will eventually create huge opportunities to
mobilize resources through capital market
securities (mainly long-term bonds).
Bear in mind that federal and provincial
governments have already passed laws relating
to public private partnership laying the
foundations of attracting private capital and
management to the infrastructure sector.
The next step is to strengthen the provincial
planning and development departments so
that they can provide the necessary technical
and nancial support to the government
departments/agencies for developing and
structuring infrastructure projects that are
attractive enough so that private investors can
raise part of the nances by issuing capital
market securities.
Advertorial
First Women Bank Ltd.
Giving Women The Power To Succeed

Celebrating
25 years of
Empowering
Women
First Women Bank Ltd. is proud to be the rst

bank for women in the region. FWBL both a
commercial bank and DFI designed, managed
and run by women, for women, was set up in
1989 by the Islamic worlds rst woman Prime
Minister Benazir Bhutto (Shaheed) who
envisioned a bank that would meet the special
needs of women entrepreneurs. Recently, the
Finance Division, Government of Pakistan has
given the additional charge of President of the
Bank to Ms. Charmaine Hidayatullah, the senior
most EVP of the Bank.
The FWBL model caters to women at all
levels of economic activity micro, small,
medium and corporate. Most importantly, the
Bank provides women with the support
services required to navigate the obstacles to
the development of business. By doing so,
FWBL is helping them emerge as key players in
the national and global economy.
The Bank has always looked at its micronance borrowers as potential SME and
Corporate clients. The Banks unique credit
policies promote asset ownership for women,
by providing nancing to business entities:
Where women have 50% shareholding
Where a woman is the Managing Director
Where women employees are 50% or more
However, the Bank seeks deposits from and
provides services to both genders.
In 1992, an ILO Geneva Study recognized
First Women Bank Ltd. as a major innovation in
Pakistan, along with Edhi Trust and Lahore
University of Management Sciences (LUMS). In
1994, Euromoney awarded FWBL the Best
Bank in Pakistan for its low administrative cost.
FWBL was the rst Commercial Bank to launch
Micro-Credit in Pakistan. In 2001, Womens
World Banking in its Global Directory proled
FWBL for Banking Innovation in Micro-Finance,
and acknowledged that FWBL features among
the worlds micro-nance leaders.
To combat child labor in the carpet weaving
industry, FWBL collaborated with ILO and
directly nanced women micro-borrowers in
rural areas. The Bank disbursed micro-credit to
2921 women living below the poverty line in 162
villages, with 100% recovery rate. Under this
project, 5842 children were weaned out from
child labor and educated through non-formal
educational centers.
The Asian Banking Award 2005 awarded First
Women Bank Limited, FWBL / ILO IPEC
Micro-Credit Program as Runners-Up in its
Micro-Finance Program category. Under this
project, one of the borrowers received the

Global Micro-Entrepreneurship Award
(Runners-up) organized by the UN Capital
Development Fund in collaboration with CITI
Group Foundation, Harvard Business School
and Pakistan Poverty Alleviation Fund.
FWBL initiatives for the empowerment of
women were recognized at all levels and the
Bank received the Brands of the Year Award
(2010 & 2011) for the second consecutive year.
Recently the Bank was conferred with the 8th
Consumers Choice Award. This was in acknowledgement of FWBLs contribution towards the
promotion of women banking in the country.
In Pakistan, when compared with other
countries of the world, female entrepreneurship is amongst the lowest in the world. With
very low female participation in the economy of
the country, the percentage of female
employers is even less than one percent.
FWBL is committed to the goal of realizing
the potential of women who require assistance
in enhancing their access to entrepreneurial
activities and forward employment. Realizing
the importance of womens entrepreneurial
activity and its linkage to loan facilities,
Womens Entrepreneurship Development
Division has been created with the objective of
Capacity Building and Skill Development of
existing and potential women entrepreneurs
and their facilitation to Business Development
and Financial Services provision. Three
Business Development & Training Centres are
functioning in Karachi, Lahore & Islamabad
under this Division.
To enhance womens entrepreneurial
capability, FWBL has partnered with SMEDA,
Department of Youth Affairs, Government of
Sindh, UNIDO, Allama Iqbal Open University
Islamabad, Women Chamber of Commerce
and Industry and AF USAID. Under the
FWBL-Gender Equity Program (GEP),
supported by AF USAID, 640 women have
successfully participated in the trainings
offered at BD & TC Karachi and Lahore
Centres.
Recently the Government of Pakistan
launched a credit scheme for youth aged
between 21 to 45 years at a concessionary
mark-up of 8%, with 50% special quota for
women. Under the scheme all FWBL branches
are providing loans to women.
The Account facilitates families to do
business from a single point. It offers many
benets for free, including a special one where
the higher the balance in the account, the
higher the number of free transactions.
First Women Bank Limited (FWBL) and State

Life Insurance Corporation (SLIC) have
entered into a strategic partnership to sell
insurance products under Bancassurance. The
three product plans Endowment Plan, Three
Payment Plan and Sada Bahar Plan are being
offered under the partnership.
In order to provide multiple benets to
customers, the Bank has collaborated with top
brands such as Oxford University Press, Stile,
and Singer. Now FWBL ATM card holders can
get discounts on their purchases.
FWBL was formed with shareholdings from all
the large public sector banks. Over time, these
banks were privatized; however, their shares in
FWBL were not transferred to the public sector.
In 2009, the Government of Pakistan decided to
keep First Women Bank Ltd. (FWBL) in the
public sector by purchasing the shares of private
shareholder banks i.e. MCB, HBL, ABL and UBL
through State Bank of Pakistan. Now the majority
of shares are owned by the Ministry of Finance,
Government of Pakistan.
The Government of Pakistan vides its letter
No. F. 4(1) DS (BR-II)/ 2000-556 dated
November 4, 2011, has exempted FWBL from
the application of the Ofce Memorandum No.
F.4. (1)/2000-BR-II, dated 12 November, 2002.
Under the said Ofce Memo, the Government
laid down certain requirements to be complied
with by public sector enterprises and
local/autonomous bodies while depositing
their working balances for their operations with
any public or private bank.
FWBL has always looked out for the best
interest of the women of Pakistan. From
economic empowerment to nancial
assistance, FWBL has always put women at the
forefront of their efforts. Taking another step
towards the wellbeing of the women of
Pakistan, FWBL has joined hands with Pink
Ribbon Pakistan to promote the noble
objective of Pink Ribbon Pakistan in providing
cancer awareness among women.
The Bank is also live on SWIFT to transfer
funds internationally. At present, the Bank has a
network of 41 branches in 24 cities of Pakistan.
Today, FWBLs mission for empowering
women remains unmatched.
To transform the status of

women from passive
beneciaries of social
services to dynamic agents
of change.

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Banking

Ali Khizar Aslam

FROM THE EDITORS DESK

SAVING MORTGAGE FINANCE

MEEZAN BANK CEO ANTICIPATES

MONEY THAT PRAYS

Banking is always important

04 / Banking Review 2013

The publication of Business Recorders

since 2000. However, there exists a

That our active financial institutions

Last but not least, branchless banking

that has shown an impressive 10 percent

The good thing is that the SBP is cognizant of the

Ever since the global nancial crisis of 2008

account and saving account) increased from 58

05 / Banking Review 2013

Continued from previous page

Governments borrowing stock

06 / Banking Review 2013

efforts and heedlessly deploy them to

asset-liability mismatch makes these products

size of Islamic banking has grown at a much

The writer is Head of

Private sector no primary

While banking in most

The writer is a former governor

If Pakistans economy continues to grow at the

investment in government securities). In value,

Policy and market failure

Focus on localized credit supply

The central policy failure is scal, i.e., the

Elsewhere, over history, the state has played a

and Turkey, where more than 40% of the

Provinces must take the initiative

07 / Banking Review 2013

Loan demand looks

Chief Executive Officer,

BR Research: How do you see the new

08 / Banking Review 2013

I wouldnt say that there is a lot of activity

such as how to manage accounts, how to

look at lending growth, the industry

The rise and fall of banking spreads

10 / Banking Review 2013

Negative correlation between currency in circulation and deposit growth

Currency in circulation (YoY Growth)

Source: BR Research calculations based on SBP data

This restricts banks ability to meet private

interest rate spreads. As of June 2008, the stock

Trends in lending and deposit rates

Source: BR Research calculations based on SBP data

their asset-mix and turned their gaze from risky

deposits eased to 13 percent in the ve years

While the banks were expecting the monetary

Source: BR Research, Federal ReserveBank of St. Louis

The listing of government securities on the

public, private and foreign banks with 20 and

The writer works as

11 / Banking Review 2013

Summits plans to turn Islamic

BR Research: Lets take it from the top.

with what is happening around the globe.

BRR: Who is providing this amount?