Thursday Jan 1, 2004
Financial Times

By Farhan Bokhari in Islamabad
Published: January 1 2004 17:50 | Last Updated: January 1 2004 17:50

Pakistan approves sale of Habib Bank to fund

Pakistan on Thursday formally approved the sale of Habib Bank, the country's second largest bank, to the Aga Khan fund for economic development (AKFED) for about US$400m in the country's largest privatisation.

The AKFED will take over the management of Habib through the purchase of 26 per cent of its stock. The fund will purchase another 25 per cent of Habib's shares in the next two years, leaving the remaining 49 per cent in the hands of the Pakistani government.

Habib, with its network of more than 1,400 branches in Pakistan and abroad, is a household name across Pakistan. Officials at the central bank in Karachi said Habib controlled up to 20 per cent of the banking business in Pakistan.

Its move follows last year's privatisation of United Bank, the third largest Pakistani bank.

"The whole purpose of privatisation [of banks] is to bring healthy competition to Pakistani banks," said Ishrat Hussain, Pakistan's central bank governor, in a recent FT interview. "When you work for the government you have no incentives to do anything. But if you are privately owned, you are under pressure to be competitive."

Senior government officials said Habib's new owners were expected to keep its senior management in place rather than appoint a new team. "Our understanding is that AKFED wants to maintain continuity," said one official.

The privatisation of Habib is a milestone for Pakistan's efforts to reverse the effect of large-scale nationalisation of the 1970s, which led to banks being run by government bureaucrats. Subsequently, government-owned banks became a favourite vehicle under successive governments for offering patronage in the form of large loans in return for political support.

In 1997 Pakistan launched a fresh reform plan to revitalise banks that centred around laying off thousands of workers and improving their balance sheets.

After Habib, the Pakistani government is only left with National Bank of Pakistan, the main bank used for functions related to the treasury. There are no plans to privatise NBP.