As Pakistan’s economy gets back up to speed, the banking sector will continue to play a leading part in its recovery. In three years, the total value of assets held by the banking system has climbed from $116 billion to $147 billion
Alittle more than two years after the first-ever handover from one civilian government to another, the numbers coming out of the macroeconomic cruncher are confirming that Pakistan is back on course to sustainable growth. Business-friendly policies and reforms initiated by Prime Minister Nawaz Sharif’s administration have led some to compare Pakistan with Colombia as champions in the economic turnaround category, citing their stable governments, market-oriented reforms and manageable security situations.
With GDP growth predicted by the International Monetary Fund (IMF) to end the year at 4.5%, it can fairly be said that Pakistan is actually doing better than the United States or Canada, as The Economist magazine pointed out to its readers in May. That same month, the State Bank of Pakistan slashed interest rates to their lowest level in 42 years, triggering a spurt in consumer spending and boosting home purchases in the GDP-critical construction sector. Not least of all, the Karachi Stock exchange was up by a year-on-year 16% as of this past July, and Bloomberg did not hesitate to place it among the world’s top 10 securities markets.
“Our government has taken painful yet necessary reforms since taking office in June 2013 which has resulted in the stabilization of the economy,” Minister of Finance Mohammad Ishaq Dar told attendees at a US-Pakistan business conference in March. “I can confidently inform you that the economy of Pakistan has been put back on the right track due to the far-reaching structural reforms, stabilization measures and initiatives of the past 21 months.”
This state of affairs is a far cry from 2013, when the IMF had to step in with a $6.6 billion credit to defuse the balance of payments crisis that greeted Mr. Sharif on taking office.
Pakistan’s fiscal deficit, which then stood at 8.8%, has since been trimmed to 5.3%. However, it still comes up short of the 4.9% cap the government had been aiming for this year and had pledged to meet as a condition for IMF support. According to the State Bank of Pakistan Governor Ashraf Mahmood Wathra, plans for staying within budget were derailed by the devastating floods of 2014 and security operations in the north of the country.
“On top of the flood disaster in itself, we were confronted with nearly 300,000 internally displaced people fleeing the area,” Mr. Wathra recalls. “The government is supporting them and they will have to be sent back and rehabilitated as well. We missed our target of 4.9% but we are hopeful the IMF will understand that those were clearly necessary, though unbudgeted, expenses.”
Mr. Wathra and his team have much to be proud of, including the recovery of Pakistan’s depleted foreign reserves, which had fallen to $8 billion at one point but are now hovering around $19 billion. When sector-by-sector results are sorted out and compared with their benchmarks, nobody expects the larger picture to be a uniformly rosy one. “For the first time in our history, demand for our exports has declined,” says the state bank head.
But these are all problems that admit solutions, and the sense that the country has turned the corner is palpable at all levels of Pakistani society. Among those with a highly positive take on prospects for prosperity is Wajahat Husain, President and CEO of United Bank Limited (UBL) one of the country’s most respected banking institutions.
“When you talk about oil prices going down you have to keep in mind that 35% to 40% of our import bill comes from oil, so clearly this is a big plus for the macro numbers,” says Mr. Husain. “With a narrowing deficit combined with the government’s resolve to get the energy situation right, you can’t ask for a better platform for initiating and completing the large-scale infrastructure projects that Pakistan is in dire need of.”
As an example of UBL’s commitment to innovation Mr. Husain points to Omni, an electronic platform in which a wide range of secure banking services are available to both account holders and walk-in customers at a ‘Dukaan’ - an unstaffed electronic outlet that extends far beyond the network of branch offices.
As Pakistan’s economy gets back up to speed, the banking sector will continue to play a leading part in the recovery. In three years, the total value of assets held by the banking system has climbed from $116 to $147 billion. Pakistan has also mandated implementation of the Basel III regulatory framework on all banks operating in the country to give the system additional resilience and transparency.
An IMF report released in August confirms that earnings remain robust and key solvency rations high for the banking sector’s big time players as well as for the often-underestimated middle tier. In the first quarter of 2015, UBL’s profits soared by 36.8% over the previous period a year earlier. Core earnings and non-interest income helped offset an increase in operating expenses. End of year results were equally striking at another long-established bank, Habib Bank Ltd (HBL), where profits surged by 24.9% to total Rs16.9 billion last year.
What was the strategy that made recovery possible? Mr. Wathra cites the implementation of a Financial Inclusion Program (FIP) that includes risk sharing initiatives, smart grant facilities for capacity development, innovation and market infrastructure development since 2008 primarily for sustainable development, and growth of the microfinance sector, branchless banking, and SME finance.”
HBL was founded shortly after independence in 1947, and has established itself as Pakistan’s largest commercial bank, with a presence in 29 countries, including in the United States since 1973. It serves eight million customers and aims to become the first Pakistani lending institution with two billion rupees on deposit by the end of 2015, as well as the largest corporate portfolio in the country.
With 1,600 branch offices and 1,700 ATM outlets strategically positioned across the country HBL holds the number-one spot, acknowledges Mr. Nauman K. Dar, the bank’s President and CEO since 2012, who has overseen the introduction of an array of new products and services including internet banking and a cash-back credit card for fuel purchases. “Innovation is HBL’s hallmark and we have always delivered financial products which aim to provide ease and convenience to improve our customers’ financial well being,” notes Mr. Dar. “This is another step towards strengthening existing consumer product portfolios while providing quality products to our customers.”
Both HBL and UBL were previously owned by the government and successfully privatized. The government’s sale of its last remaining shares in HBL last April was the largest provatization deal in the last decade, with $764 million of the total sale price of $1.02 billion coming from foreign sources such as Morgan Stanley, Wellington and Templeton. Roughly half of the price realized went to pay off a tranche of the IMF loan. That success was rapidly followed by the government’s decision to offload the remaining 20% of their UBL shares, in what was the first equity transaction by the Privatization Commission in the last eight years.
The National Bank of Pakistan acts as the commercial arm of the State Bank of Pakistan, but is in the process of transitioning from public sector to become a commercial bank, says its president, Syed Ahmed Iqbal Ashraf. “Government revenues are collected by the NBP and given to the State Bank or the Ministry of Finance. Then whenever our country needs financial expertise, we are always there. We work for the sake of business and in the national interest.”
At the retail-banking end of Mr. Ashraf’s remit, the emphasis is increasingly falling on Sharia-compliant banking. NBP has five Islamic banks and 15 Islamic windows in operation. “The State Bank of Pakistan is encouraging banks to separate Islamic banking from the conventional type. For this reason we are establishing a bank with separate management, a different CEO and totally different staff. I believe that other banks will be working along the same lines. At the moment Islamic banks hold 14-15% of the deposits. I think this will rise very quickly as people believe that it is a safer type of banking.”
After all, in banking, it is the bottom line that counts and Pakistan being a country with a population of 180 million people where only 12% currently have access to essential financial services, there is still a lot of room for growth.. Local players are aware of the opportunities awaiting them if basic operations like paying utility bills are made available to an immensely wider customer base in the northern part of the country, says Sirajuddin Aziz, President and CEO of Habib Metro Bank (HMB).
“Until three years ago, HMB was largely centered in Karachi, the country’s commercial capital,” recalls Mr. Aziz. “We also had a sparsely spread branch network in the north. Since then, we have worked on strategic organic growth by enhancing our branch outreach with a particular focus on northern Pakistan.”
Opportunities in Pakistan’s banking sector and other areas under development may come as old news to canny foreign investors. In 15 of the 21 locally incorporated private banks, foreign investors are the majority shareholders. Together, those 15 banks hold over 50% of the sector’s total assets.
“The US has been consistently involved with Pakistan since the 1950s and understands the terrain, the people, the logic and even the political system better than any other trade/business partner,” says Mr. Aziz. “Infrastructure development offers many attractive opportunities. Many listed companies are looking to link up to a major American firm. So I think Americans have got a greater understanding of Pakistan than some others.”