Raza Jafri |
Banks play an important intermediary role in any economy, transferring money from savers (depositors) to the users of capital (the borrowers). Banks provide the crucial element [capital] to what economists describe as the factors of production which help to drive the country’s economic growth – these include– land, labor, capital, and entrepreneurship.
A well-functioning banking system discharges this intermediation function efficiently while providing other value added services such as trade facilitation, money transfer, and safety deposit lockers, etc. A sound banking system is also strongly capitalized, and well regulated. If it has these characteristics, the banking system can help provide impetus to economic growth, resulting in the wellbeing of business enterprises and the welfare of the people.
Pakistan’s Banking Sector
Pakistan’s banking sector has a rich history and has undergone several distinct phases. Some banks predate the creation of Pakistan and, by extension, also the central bank. Banks were nationalized in the 1970s, before the 1990s ushered in the first wave of privatizations and entry of new private banks. MCB was among the privatized banks while Bank Al Habib, Bank Alfalah and Askari Bank, among many others, were incorporated in the 1990s.
Competition from Islamic banks have pushed conventional banks to open Islamic banking windows; such as those of Habib Bank and Bank Alfalah.
The second and equally important stage of banking sector reforms commenced in the late 1990s and continued into the early 2000s. This phase saw the restructuring and eventual privatizations of some of the country’s largest banks such as Habib Bank and United Bank.
Transforming them from loss-making and undercapitalized entities to some of the most profitable and valuable banking franchises in Pakistan. This period also coincided with the successful re-launch of Islamic banking (initial launch miserably failed in the 1980s).
Meezan Bank was the first Islamic commercial bank to launch in Pakistan in 2002, closely followed by Bank Islami (2005), Dubai Islamic bank (2005), and later existing commercial banks all introduced Islamic windows. Within 15 years, Islamic banking now has around 15% of the overall banking market. Reforms have continued since then, but have been geared towards two broad areas, i.e. improving the stability of the financial system through higher capital requirements, and encouraging greater savings/financial inclusion via a managed increase in deposit rates.
There have been stumbling blocks along the way the sector saw high provisioning against non-performing loans across 2009-2011, and in 2017-2018, foreign operations of some banks saw large losses. That said, the overall picture remains one of strength, which can be built upon as the banking sector enters the next phase of its lifecycle. This next stage can encompass a greater focus on digital/branchless banking, tighter compliance standards, more robust IT systems, more capital retention, and recalibration in business models to concentrate more on the Pakistani market rather than on foreign operations.
MCB was among the privatized banks while Bank Al Habib, Bank Alfalah and Askari Bank, among many others, were incorporated in the 1990s.
At present, there are 30 commercial banks in Pakistan, a number that has gradually reduced from 36 a decade ago, as a few foreign banks have exited from Pakistan and consolidation has occurred within local banks due to mergers. The sector is dominated by the “Big-5,” i.e., Habib Bank, National Bank, United Bank, MCB Bank, and Allied Bank, which together account for almost 55% of the industry’s assets. However, banks such as Bank Alfalah, and Meezan Bank has grown rapidly over the last few years, challenging the traditional supremacy of the largest banks.
There are relatively few public sector owned banks in Pakistan, they account for around 20% of industry’s assets, unlike India for instance. Islamic banks which started in 2002 have made significant inroads into the market and currently account for around 8% of the market. Meezan Bank is the national champion in Islamic banking and has close to 5% market share of the overall industry’s assets. Competition from Islamic banks has pushed conventional banks to open Islamic banking windows; such as those of Habib Bank and Bank Alfalah.
More meaningful competition within the sector, something which the SBP has actively pushed for over time, is a good thing as it can lead to better rates and services for depositors, and a greater propensity for banks to extend loans even at tighter pricing. Other than the above mentioned Commercial Banks, other categories of deposit-taking institutions in Pakistan include Microfinance Banks (e.g. Khushhali Bank), Specialized Banks (e.g. Zarai Taraqiati Bank), Development Finance Institutions (e.g. House Building Finance Company), Investment Banks and Modarabas. This article, however, primarily deals with commercial banks.
Raza Jafri possesses over 10 years of experience in sell-side equity research. He is currently associated with Intermarket Securities Limited. Earlier, he was the Head of Research at AKD Securities Limited. Mr. Jafri carries an in-depth understanding of majors sectors at the PSX with a specialization in covering Commercial Banks. He was awarded “Best Analyst of the Year 2015/16” by CFA Society Pakistan and was also recognized for “Best Banks Coverage” by AsiaMoney in 2012. Mr. Jafri graduated with a B.Sc in Accounting & Finance from the Lahore University of Management Sciences, is a CFA charter holder and also serves on the Board of the CFA Society Pakistan.