ISLAMABAD, 11 November 2002 — The just-started foggy political transition apart, Pakistani banks appear to be on their way to turn a page for the better. Although, right now, this is not the season to make long-term forecasts on the financial sector, but positive news from several banks, and financial institutions, is almost oozing out — an indicator that whosoever comes into power in November, the financial sector will hope to stay upbeat.
The country is, at presently, going through a transition from President Pervez Musharraf’s 3-year old military rule to a comparatively civilian government. The Oct. 10 elections have thrown up three major groupings — and contenders to power. All the three already have named their prime ministerial candidates: They include: Mir Zafrullah Jamali, a former chief minister of Baluchistan province located close to the Gulf who also has served as a federal minister in Islamabad, he is nominee of pro-Musharraf Pakistan Muslim League (Quaid-e-Azam). Pakistan Peoples Party (PPP) led by former Prime Minister Benazir Bhutto, now in self-exile in Dubai-London, has named Makhdoom Amin Fahim. The right-wing grouping of six religious-political parties clubbed together as Mutahidda Majlis-e-Amal (United Action Council) (MMA) have named Maulana Fazlur Rahman, for the post. But, in the ultimate analysis, at least two of, if not all three of these three groups will have to join hands to form a stable government.
Efforts also are afoot to form a “consensus government”, comprising all the parties elected to the 342-member National Assembly that sits in Islamabad. The post-election political uncertainties contrast with the state of the financial sector that now appears upbeat by way of its going into big deals.
The United Bank Ltd. (UBL) whose 51 percent shares and management control has just been taken over for $209 million, by Gulf-based Abu Dhabi Group and UK’s Bestway Holdings Limited (ADG-BHL) is led the consortium Chairman Sheikh Nahyan Mubarak Al-Nayhan, the UAE education minister.
UBL has just concluded a short-term bridge financing worth Rs.1 billion for textiles-and-fibers Gulistan Group. Amar Zafar Khan, UBL president, and Gulistan Chairman Mian Abdul Shakoor, signed the loan. Shakoor said, “Rs.1 billion bridge finance will be used for balance sheet restructuring of the Gulistan group companies.” “It will help the group to pay off some shorterm loans, previously taken from a number of banks, other than UBL,” he said. UBL officials said, “Gulistan have obtained the credit in order to launch its Rs.1.2 billion term finance certificates (TFCs),” in March, 2003. The bridge finance, advanced at a fixed, undisclosed, markup rate, is expected to considerably reduce the financial cost of production.
It will enhance the credit worthiness of the Gulistan group that has a Rs.8 billion asset base, annual sales of Rs.7.5 billion, and exports of Rs.5 billion. Gulistan, by issuing TFCs, is positioning itself to successfully face the post-quota textile world after December 2004.
Bankers hope that deals like UBL-Gulistan are likely to spur the demand for credit from the sluggish economy and the private sector that has not been in the market for a long time.
Besides a recessionary situation, prevailing since the late 1990s, political uncertainties and a high interest rate have dampened the demand for credit. The central bank, State Bank of Pakistan (SB), reports that the commercial banks were charging an average 11.9 percent interest during the last three months.
Lending rate has declined over years, but business and industry still demand a substantial cut to enable them to reduce cost of production to be able to compete in the global market place.
After the ADG-BHL takeover, UBL stays in the limelight on other counts, too. The national flag carrier, Pakistan International Airlines, (PIA), for instance, has now mandated UBL, Citibank and Jeddah-based Islamic Development Bank (IDB), to arrange $150 million financing for its fleet renewal and upgradation plan. The consortium will provide a one-year facility of $85 million, to be replaced by a 3-year facility of $150 million. This facility, bankers say, will be in the form of an ‘ijara’ — an Islamic mode of financing.
Out of $85 million, UBL has underwritten $45 million, and Citibank-Saudi American Bank $40 million. IDB will underwrite $70 million in the 3-year facility. Bankers point out that it is for the first time that IDB has gone into a partnership with a Pakistani bank to arrange such financing. PIA management claims, after 9/11 setback resulting in passenger reduction, the airline is now on the upswing. It posted an after-tax profit of Rs.1.4 billion in 9-months that ended September, 2002. The money will enable PIA to pay the first tranche to planemaker, Seattle-based Boeing for purchase of eight new Boeing 777s. The aircraft, PIA, hopes will cut fuel cost, attain operational efficiency and upgrade service to its customers.
Faysal Bank Ltd. (FBL), is another Middle East-based bank that is doing good business in Pakistan. It has posted 6.3 percent growth in its after-tax profit of Rs.491.4 million for nine months, ended Sept. 30, 2002, up from Rs.462.4 million in the like period of 2001. Its markup income for the period rose 18.9 percent to Rs.780.7, up from Rs.657.2 million in the like period of last year.
FBL started operations in Jan. 1, 1995, by taking over six branches of Faysal Islamic Bank of Bahrain EC that was in business in Pakistan since 1987. Al-Faysal Investment Bank Ltd. and FBL merged Jan. 1, 2002. It has now 20 branches in Pakistan. The merged FBL is owned by subsidiaries of Dar Al Maal Al Islami (DMI) Trust and Shamil Bank of Bahrain EC. DMI Trust Bahamas is their overall holding company.
Coming up for sale within the next few weeks is Pakistan’s second largest bank — state-owned Habib Bank Ltd. (HBL). It will be the second sale of a major bank and follows Sept. 17 sale of UBL to ADG-BHL. HBL has an 18 percent market share of the banking industry, 1,705 branches in Pakistan and 55 branches in 26 countries in the Gulf, Middle East, Europe United States, Asia and Africa.
Zakir Mahmood, HBL president, says Pakistan government will first make a strategic sale ranging between 26 and 51 percent of its shareholding and transfer the management control to the buyer. It is likely to take place before March. It will then be followed by an initial public offering over the Karachi bourse.
Who are the potential buyers? Privatization Commission (PC) expects a considerable Gulf-Middle East interest in the proposed sale. Eight groups have so for indicated interest in the purchase, of which four have already supplied their financial data and other qualifications. “PC is carefully examining this information and will shortly prioritize the potential bidders,” a commission official told this correspondent. The bidders include Paris-based Agha Khan Foundation, Middle East financial interests, and a consortium of two large Pakistani textile groups.
Big losses, huge default in repayment of loans running to as high as Rs.300 billion, high administrative cost, and extremely excessive manpower that led to destructive trade unionism and feather-bedding, forced the government to restructure banks and financial sector reforms, initiated in 1997. On the top of that state-owned banks were extremely inefficient and their cost-to-income ratio had reached an unheared of level of 90 percent in the 1990s. It has gradually been scaled down to 65 percent. Good international banks have a cost-to-income ratio of as low as 40 percent.
Positive news, too, is coming from the still-new ‘modaraba’ companies that operate on Islamic mode of business. First Habib Bank modaraba, for instance, has earned an after-tax profit of 54 percent in fiscal 2002, “despite a difficult business environment,” according to its company report. The after-tax profit rose to Rs.84 million from Rs.54 million a year-earlier. ‘Modarabas’ and term finance certificates (TFCs) are increasingly becoming popular for corporate financing. Industry analysts see a big future in such new modes of finance, while several banks and financial institutions are developing new instruments and products to face growing competition.