|By Farhan Bokhari, Special to
Gulf News |

View from Pakistan: Banking sector enters new phase

Ishrat Hussain, Pakistan's central bank governor, expects to see a significant shift in the pattern of banking across the country after the successful privatisation of Habib Bank, one of Pakistan's three largest public sector banks.

The sale of 51 per cent of Habib Bank's stock to AKFED (Aga Khan Fund for Economic Development) for $400 million in Pakistan's largest bank privatisation ever has set the pace for policy makers such as Hussain to claim that banking has returned to the private sector.

Central bank officials claim that up to 80 per cent of Pakistan's banking business is now firmly run by privately owned banks - a firm reversal of years of control by the public sector.

"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", said Hussain.

"The whole purpose of privatisation (of banks) is to bring healthy competition to Pakistani banks" he added. For many Pakistanis, Habib Bank is a household name with its network of more than 1,400 branches across the country and abroad.

According to central bank officials, Habib Bank controls up to 20 per cent of the banking business in Pakistan. The privatisation of Habib bank marks an important new phase for Pakistan's effort to reverse the effects of its large scale nationalisation in the 1970s.

Consequently, banks became dominated by government bureaucrats and government appointed bankers. As a consequence, such banks became a favourite vehicle for successive Pakistani governments to be used to give out patronage to political favourites in forms such as extending large new loans.

In the two decades following the nationalisation, banks accumulated large bad debts which jeopardised their ability to ever become profitable.

Eventually, under a bank reform and revitalisation plan launched in 1997, Pakistan began laying off thousands of surplus workers in order to improve the balance sheets of banks.

"We are now entering a new phase in Pakistan, where banks are conclusively going to be in private hands" says Sherani, chief economist at the Pakistan offices of ABN-Amro, the Dutch bank.

"This is a new phase where banks would be forced to become more competitive. "

One part of that competition has already come in the shape of falling interest rates of the past two years which have now begun prompting an increasing number of Pakistani businesses to begin borrowing more.

During the current financial year (July-June), new car sales are set to rise to about 100,000 up from just 30,000 about four years ago, according to the latest statistics from the finance ministry in Islamabad.

Analysts note that the jump in new car sales is driven in part by the increasing availability of leasing opportunities for new car buyers.

However, government officials concede that the increasing push towards privatisation has indeed left behind the challenge of continuing to offer socially responsible banking, such as banking outlets which offer credit to the poor and low income families.

One response to the demand from such clients has come in the shape of a select few micro-credit initiatives including one launched by AKFED before it took charge of Habib Bank.

Unlike meeting the demands from large borrowers with healthy collaterals, micro credit banks and outlets strive to offer credit including that on concessional terms, often without collateral to meet the needs of low income borrowers.

The author is a journalist based in Pakistan