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Foreign banks in Pakistan.

The current era has indeed witnessed phenomenal growth in the financial institutions of the country. By March 1995, there were as many as 43 scheduled banks, 13 DFIs, 52 modarabas, 26 leasing companies, 12 investment banks, four housing finance companies and two discount and guarantee houses. Along with Pakistani banks, the number of foreign banks operating in Pakistan at the end of June, 1995 has been 19 with 71 branches, which have offered tough competition to Pakistani banks and thereby contributed in upgrading the standard of banking in the country. Their growth, performance and professionalism have been indeed outstanding and commendable.

It is noteworthy that the foreign banks with a 15% ratio in the total deposit have earned a profit of around 50% of aggregate profit of banks. This speaks volume of their efficiency, better technology, innovative products and high standard of service. However, there is another perception about such accomplishments. It is argued that foreign banks generally operate in safe areas, insofar as their operation is confined to big commercial and industrial cities, whereas the local banks are required to operate in rural and remotest areas also. Besides, foreign banks handle limited amount of accounts, catering mostly to multi-nationals and big companies. They are mainly concentrating in the field of foreign trade financing with emphasis on export-financing, although recently, big industrial projects are also being covered by their portfolio. All the Euro-Dollar loans syndications for the government of Pakistan are managed by foreign banks.

They are charged for exorbitant charges for many-faceted services. Only recently, a foreign bank has started charging "Service fee on outstanding balance, whenever and wherever applicable at the rate of 3% per month effective from July 1, 1995." Some benefit of reduced-cost and increased profit, sustainable due to sound and scientific management must also be passed on to their clients in the form of diminished service charges. The administrative cost of foreign banks in Pakistan is only 4%, compared to as high as 24% of nationalised banks.

We wish that the foreign banks must enlarge the scope of their operation and undertake such functions also, as catering the financial need of agriculture and small scale industry, which are being performed by the local banks and thus contribute in a big wayt to the socio-economic development of the country. This will enhance their prestige and creditability and will be well-construed as full patronage of Pakistan and its economy. Their adequate and expanded coverage of both area and population would help exploit full potential of house-hold savings which continue to be lower, as compared to identical economies.

The government, in pursuance of its policy of deregulation as well as in line with the dictates of IMF, has introduced a series of financial reforms and slowly evolving a marked-based monetary policy. The State Bank of Pakistan has withdrawn the additional ratio of special cash deposit of 1.6% by banks. Similarly, credit deposit ratio has been raised from 31% to 36%. The Central Bank has intensified the process of open market operation as an instrument to contain credit and consequent inflation. Nevertheless, the decapping of interest rate, to be determined now by the market forces of demand and supply, has had a damaging and deleterious impact on the cost of production as well as exports. The foreign banks, which have an access to the cheap loanable funds in the country of their origin and have relatively more freedom to operate, must be instrumental in lessening the cost of borrowing and thus preventing the local industry from being unviable and the exports incompetitive. They can indeed play a pivotal role in making the off-share banking of providing loans on L/cs to the exporters a real success, as envisaged in New Trade Policy.

Foreign Investment

The national rate of saving in Pakistan, is around 14% and the current rate of investment is 19% of GNP. This Saving-Investment gap is bridged by borrowing, either through indigenous or foreign sources, with all its critical in built problems.

The foreign banks, besides making their own direct investment in various projects, must act as catalyst to induce private foreign investment. Needless to emphasise that Pakistan is a land of opportunity, it is a land of splendour and a haven for foreign entrepreneurs. The macro-economic policy framework is very cordial and conducive for foreign investment and the package of incentives and facilities is second-to-none. It is due to this reason that a record memorandum of understanding to the tune of over $20 billion worth of investment were signed and the foreign investment of about 1.7 billion dollar was recorded during last fiscal year. The foreign banks could make their valued contribution in re-enforcing this favourable trend.

It has been reportedly learnt that the foreign banks have taken up the matter with State Bank for allowing them margin and options trading. It seems to be a sort of hedge trading and whose success would be conditioned by necessary check and balance as well as an effective regulatory framework. I hope that you would like to enlighten us on this very subject as we are not very much familiar with the proposed mode of trading.

Training Institute

It is indeed reassuring that the ANZ Grindlays Bank in collaboration with the Institute of Business Administration, sometime back, launched the MBA in banking programme, to enhance the quality of professionalism in banking. Admittedly, the foreign banks are known for their drive and dynamism because of better training and professionalism. It would indeed be in the fitness of things, if they contribute their share in the human resource development by setting up an institute for Training in banking so that their knowledge, expertise of modern management and technology is transmitted to the existing as well as prospective personnel of local banks. A capable corps of bankers, which could meet the dictates of the modern technical and competitive era and conform to the international level of efficiency and creditability is indeed an unescapable necessity of this country.


 Performance of Local & Foreign Banks - 1993

 (Rs. in Billion) (Market Share in %)
 Local Foreign Local Foreign
Description Banks Banks Total Banks Banks Total

Deposit 525.687 97.283 822.970 84.38 15.62 100.00
Pretax Profit 7.012 5.713 12.725 55.00 45.00 100.00
Advances 290.930 50.994 341.924 85.00 15.00 100.00

Source: Performance Highlights of Commercial Banks in Pakistan by
S.M. Ali Sohail, Director, Indus Bank Ltd.

 Assets - Profit Ratio of
 Foreign Banks Operating
 in Pakistan and China

 Foreign Foreign
 Banks in Banks in
 Pakistan China
Description (`1993') (`1995')
 (a) (b) (c)

Assets (Billion Rs.) 126.40 449.50
Profits (Billion Rs.) 5.70 4.94(*)
Ratio (%) 4.50 1.10

(*) Estimated on the basis of 6 months
profit i.e. Jan-June 1995.
Source: 1. Performance Highlights of
Commercial Banks in Pakistan.
2. Dawn of August 06, 1995,
for column (c).

 Spread Rate of Selected Local & Foreign Banks
 Operating in Pakistan - 1993

 Av. Lending Av. Borrowing Spread
Name of Banks Rate % Rate % %

MCB 21.46 7.52 13.94
NBP 23.05 6.27 16.78
HBL 15.30 6.87 8.43
UBL 12.78 5.38 7.40
Bank of Tokyo 22.22 6.14 16.08
American Express 23.64 6.31 17.33
Bank of America 20.81 7.19 13.62
Citi Bank 20.68 6.54 14.14

Source: Chamber's Computation Based on Balance Sheets.
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Author:Sattar, Ahmed A.
Publication:Economic Review
Date:Sep 1, 1995
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