By Muhammad Aftab
Monday 16 December 2002
Last Update 16 December 2002 12:00 am
ISLAMABAD, 16 December 2002 — Foreign banks and their domestic counterparts have been allowed to expand and open new branches in Pakistan, fulfilling their persistent demand, while plans are afoot to channel the banks’ current excess liquidity into housing for overseas and resident Pakistanis.
The State Bank of Pakistan (SBP), the central bank, action will enable foreign banks to compete openly with their domestic counterparts. The foreign banks hope to gain a big part of the market as a result of their superior service, modern technology, and better-educated and better trained personnel. But, Pakistani banks, already have been forced to pick up the fight. They may not take foreign competition lying down because they wish to retain their market share, as well as gain more of the business.
The phenomenon of modern technology and faster communications is already producing better results in Pakistani banks. Private Pakistani banks, small but lean, are putting up a good show, while the huge state-owned banks, fearful of loosing their existing share of the market, are also putting up their act together, deploying modern technology and younger and better educated personnel, especially in the senior cadres.
The prospects of the banking business have brightened up for foreign banks who have, for years, been asking the SBP to permit them open new branches. There were particularly encouraged by the fact that already they were handling a major portion of foreign trade of $20 billion a year. This volume includes over $9.0 billion of exports and $11.0 billion of imports. The SBP Banking Policy Department (BPD) has opened up on banks by revising its branch licensing policy and ATMs, that was in force since April 1, 2001. It has laid down new criteria and ratings for foreign and domestic banks, for future expansion, separately.
The common criteria both for foreign and Pakistani banks lays down that the eligibility of a bank to open a new place of business will be considered by the SBP keeping in view, among other things, the financial strength of the bank, as seen from its net worth, adequacy of its capital structure, record of earning capabilities, future earning prospects, managerial capabilities, bank’s liquidity position, track record of the bank’s adherence to prudential regulations, credit discipline, quality of its customer services, staff-management relations and convenience and needs of the population of the area to be served by the proposed branch.
In addition to the above, the performance of the existing branches of foreign banks foreign banks, their level of commitment to the local market, sound international reputation, provision of full range of banking services, and new investment by their head offices will be the guiding factors for issuing fresh licenses. Preference will be given to open new branches to banks which expedite home remittances sent by overseas Pakistanis, a large number of whom are working in the Gulf, Middle East and US, and to those branches which will be electronically connected. The domestic banks will have to provide services for receiving utility bills, and open branches in rural areas and places that are under-banked and lack adequate banking services.
Each bank that proposes to establish new branches will transmit to SBP an annual branch expansion plan (ABEP) for approval by Nov. 30, 2003, or 30 days before start of the new calendar year, for branches planned to be opened in 2004. Approval of the ABEP will be follow by applications to SBP for opening individual branches.
The banks should also indicate in the ABEP about the number of branches they wish to close down, or relocate as a part of their restructuring and downsizing.
Another major move is to channel the foreign and domestic banks’ present excess liquidity in the almost new and untapped field of financing housing. The government, as well as the SBP, are urging banks that in order to increase their profits, they should invest in providing credit for housing and mortgaging. The scope and profitability of this sector is enormous.
Take, for instance, the demand. Pakistan has a backlog of 5.38 million to 6.0 million housing units that need massive financing but only Rs.3 billion to 4 billion annually are presently available. The government’s 1998 population and housing census indicated that the country had 19.3 million houses — 67.7 percent in rural and 32.3 in urban localities.
The new annual demand is 570,000 houses while the yearly shortfall is 270,000 houses. It will take 20 years to clear the backlog of 5.38 million houses in case half a million new houses are constructed each year. If that happens in fact, it will revive the economy because construction is a labor intensive industry and its spill over and multiplier effect will help boost nearly 40 industries ranging from cement, iron and steel, to sanitary and electrical fittings and paints.
Shaukat Aziz, finance minister, has just addressed foreign and domestic bankers and representatives of international financial institutions, at a conference on housing finance. He estimates “the total housing finance demand is close to Rs.68 billion, if commercial banks design products for construction of at least half a million housing units every year.” The amount is estimated on the basis of a house costing an average Rs.500,000 — which a very conservative figure — of which 50 percent is self-financed by the owner, the total credit demand will be around Rs.68 billion a year.