Pakistan's banking industry is going through an interesting time with talks of consolidation and acquisitions from international players, including those from the GCC and the UAE. Pakistan is also moving towards becoming a major centre of Islamic banking centre over the next four-five years. Yawar Mian reports for MONEYworks from Karachi.
The banking sector in Pakistan is going through a phase of consolidation. There are now 40 banks in the country and their number is likely to be reduce to between 25 and 30 over the next three-five years through mergers and acquisitions, particularly after State Bank of Pakistan's (SBP-Central Bank) call to banks to increase their paid-up capital to US$100 million by 2009 from US$50 million at present. Analysts and economists believe that many small local banks may not be able to raise their capitals and their shareholders would rather sell out to lucrative offers by bigger and stronger international banks, which are now turning to Pakistan's emerging economy.
The first foreign heavy weight to make the move is Standard Chartered, which has bought more than 90 per cent of Union Bank for a little under US$500 million. The acquisition has made Standard Chartered the largest foreign bank in Pakistan. The combined branches of the Union Bank and Standard Chartered will be brought under a single entity Standard Chartered Pakistan Limited, which will diversify and expand operations across the country in a step by step manner. "For now, we are focusing on consolidating this acquisition. As a policy, we do not believe in growth through acquisitions only. We plan to have about 100 branches all over Pakistan over the next two to three years," says Badar Kazmi, chief executive officer (CEO) of Standard Chartered Pakistan. "The acquisition of Union Bank is a reflection of our confidence in Pakistan's economy.
Union Bank was a value proposition. We will now be among the top five banks in the country in terms of assets and profits."
Standard Chartered's move has triggered a round of aggressive manoeuvring by other foreign players. ABN AMRO is now undertaking a detailed due diligence process for the acquisition of Prime Bank, while HSBC, which re-entered the Pakistani market recently, is also understood to be interested in buying a local bank.
BNP Paribas and Barclays Bank are the other two international majors pursuing entry into the Pakistani market through the acquisition of local institutions. These international players are attracted by huge profits being made by banks in Pakistan, which grew by 99 per cent in 2005 to US$790 million and 65 per cent in the first six months of the current financial year to US$533 million compared with US$323 million in the corresponding period of the previous year.
"We believe that the overall bank profits in 2006-2007 will grow by between 50-60 per cent and at least by 20-30 per cent in the two years after that. Mergers and acquisitions would continue to be the focus in the near-to-medium term in Pakistan," says Mohammed Sohail, director of equity marketing and head of research at Karachi-based Jahangir Siddiqui Capital Markets. "We have seen similar activity in other emerging markets in the last five to seven years. More private sector banks in Pakistan will be taken over by foreign banks, whose share of the lending portfolio in the country will also increase."
Barclays Bank is moving aggressively and, since acquiring a licence to operate in Qatar's booming economy in early September, has unveiled plans to move into Pakistan in 2007. Qatar is a very attractive market with the highest per capita income in the Middle East and a GDP per capita which is amongst the highest in the world. To focus on emerging and new markets, Barclays has already taken on several senior bankers from Citibank. Barclays Global Retail and Commercial Banking appointed Ahmed Khizer Khan as chief executive new markets for Barclays Global Retail and Commercial Banking. Khan ran Citibank Global Consumer Bank in Pakistan and is now based in Dubai, with responsibility for Barclays businesses in the growing markets of Egypt, UAE, France and India.Barclays, which has clearly stated its intention to generate at least 50 per cent of its income from outside the UK, aims to be where the prospects for growth are the greatest. This means that it is increasingly looking to the world's growth economies. Khan followed Frits Seegers, chief executive, Barclays Global Retail and Commercial Banking, who was previously Citibank's head for Europe and Middle East.
More UAE banks knocking at the door
National Bank of Abu Dhabi (NBAD), the UAE's largest bank in terms of assets, and First Gulf Bank, backed by several younger members of the ruling Al Nahyan family of Abu Dhabi and their close and trusted business associates, have also applied to the SBP for licences to set up operations in Pakistan. It cannot be ruled out that once the two banks secure the licences they may also seek to buy parts or whole of some of the smaller, but established banks in the country. All these banks are being attracted by Pakistan's high margins of up to 7.5 per cent between interest rates on loans and deposits, higher than regional and international markets.
"In the next year or so, the margins are not likely to go down in a significant manner, as there is a rising competition for deposits. We could see the margins drop by 20-25 basis points and settling at around 7.25 per cent. We will see smaller banks looking to merge," says Sakib Sherani, chief economist at ABN AMRO Pakistan. "We have not seen a big shift out of deposits and that has given banks room to continue with high margins."
Consolidation is also coming through the launch of global depository receipts (GDRs) by some local banks.
Muslim Commercial Bank, owned by the owners of one of Pakistan's leading textile and industrial conglomerates, the Nishat Group, has recently closed a US$150 million GDR and is set to use the proceeds to diversify the range of its product portfolio and expand the number of branches across the country. National Bank of Pakistan has also announced plans to launch a GDR issue in the near future and other banks may also follow suit. "The successful launch of a GDR by MCB has also made listings on regional and international markets by local banks real possibility," concludes Sherani of ABN AMRO Pakistan.
The rise of Islamic banking
By the end of 2006, there will be five Islamic banks operating in Pakistan. SBP set up an Islamic banking department in September 2003 and has so far issued licences to four Islamic banks Meezan Bank, Al Barka Islamic Bank, Dubai Islamic Bank (DIB) and BankIslami Pakistan Limited. To promote Islamic banking in the country, the SBP unveiled a three-pronged strategy: to allow the establishment of full-service Islamic banks in the private sector; setting up of subsidiaries for Islamic banking by existing conventional commercial banks; and allowing conventional banks to set up stand-alone branches for Islamic banking.
Market estimates suggest that Islamic banking is set to grow by 10 per cent a year in Pakistan. Murabaha products account for 44 per cent of the total Islamic banking share, Ijara for 30 per cent and Diminishing Musyarakah at 13 per cent. Islamic and conventional banks offering Islamic products are now focusing on developing and marketing Musyarakah, Salam, Istisna and Qard al-Hasana to a rising number of customers who are turning to interest-free (Riba-free) banking.
"The outlook appears to be very positive for Islamic banking. The competition is growing in the market but there are immense opportunities for well-run and organised Islamic banks," says Shoaib Ahmed, chief financial officer of Emirates Global Islamic Bank which has applied for opening 10 branches across Pakistan.
Five these are ready to start operations as soon as the bank gets the go-ahead from the SPB and plans to expand its branch network to more than 40 branches over the next three years and also plans to launch an initial public offering.
There are now over 70 Islamic banking branches across the country, while a rising number of conventional banks are offering Islamic banking products through their regular branch network. Meezan Bank, which started operations in late 1997, now has 41 branches across the country. The bank was issued the first full-service Islamic banking licence by SBP in 2002. The most recent Islamic banking branch licence issued to a conventional bank by SBP was on September 19 to National Bank of Pakistan for its first Islamic banking branch in Karachi. The number of total stand-alone Islamic banking branches of conventional banks now stands at 103, while licences have also been issued for opening 12 new branches, which have not started operations yet, to Islamic and conventional banks.
Banking analysts say that the Islamic banking environment is now more conducive in Pakistan than three-four years ago. However, the availability of human resource is a sizeable challenge and banks are focusing on training conventional bankers and some, such as the Emirates Global Investment Bank, which is scheduled to start operations by the end of November, plan to set up their own training centres to train fresh Islamic bankers over the next four-five years.
DIB leads the expansion drive
DIB, the world's first full-service Islamic bank, plans to have 100 branches across Pakistan over the next 18-24 months. DIB opened its first branch in Karachi on March 28 and at present has eight branches in the country two in Karachi and one each in Lahore, Faisalabad, Rawalpindi and Islamabad. By the end of 2006, four more branches will start operating, of which two are being set up in Lahore, and one each in Karachi and Peshawar. DIB is currently focusing on corporate and investment banking but has its sights set on becoming a full-service bank within a year. It is scheduled to start consumer banking operations within the next three months. "There is big scope for Islamic Banking in Pakistan. We do not want to be a niche bank.
We want to deliver world class banking services the Islamic way," says Adeel Rafi, vice president and head of advisory at DIB Pakistan.
In the long-term, Pakistan could become a resource centre for Islamic banking from where trained human resource could be made available to regional and international banks. The SBP's decision to allow conventional banks to open Islamic windows has also stimulated growth of Islamic banking and it has been proactively encouraging Islamic banks to set up quality operations in Pakistan. But to get the desired results, Islamic banks need to work together to develop the sector, as Islamic banking is still a new concept and there are some misconceptions in the minds of customers who have grown up in a conventional banking environment. There is a need for creating more awareness about Islamic banking and setting up a customer-friendly branch network.
Challenges and issues
The future appears bright but Islamic banking does face some challenges, especially when banks try to mobilise funds in a non-conventional manner. The market and the regulator (SBP) are very familiar with conventional banking, and, at times, there appears to be a lack of understanding and expertise. This is because the risk profiles of some Islamic financial products are more complex than conventional banking and may not be addressed by Basle II. The profit-loss sharing nature of Islamic banking is also a relatively new concept for the customers. Some of the regulatory challenges are protection of depositors as returns cannot be significantly lower than conventional banks.
Another challenge is that the risk premium in Islamic banking is higher than conventional banking, especially in the absence of hedging products and the presence of Shari'ah compliance issues as to what is permissible and what is not. There also appears to be some ambiguity about the enforceability of contracts, and whether disputes would be handled by civil or Shari'ah courts. Furthermore, there is scarcity of trained lawyers at the Shari'ah courts. Accounting, auditing and taxation systems are also underdeveloped due to lack of expertise and knowledge of Shariah. The taxation structure, the need for product innovation and development, higher transaction costs and scarcity of trained Islamic bankers are issues that need to be addressed sooner rather than later to facilitate the development of an efficient Islamic banking system.
© UAE MONEYworks 2006
