Foreign banks were optimistic about the Pakistani market in mid 2000s. But sluggish economic growth and poor security in the country unlocked a wave of assert selling and mergers and acquisitions. Europe-based Barclays Bank sold its Pakistan business to Habib Bank. HSBC Holdings sold its local units and Citi disposed of its commercial asserts in Pakistan.
Foreign banks were optimistic about the Pakistani market in mid 2000s. But sluggish economic growth and poor security in the country unlocked a wave of assert selling and mergers and acquisitions. Europe-based Barclays Bank sold its Pakistan business to Habib Bank. HSBC Holdings sold its local units and Citi disposed of its commercial asserts in Pakistan.
Assets under management of foreign banks slid to Rs239 billion in 2014 from Rs264 billion in 2013. Total deposits stood at Rs152 billion in 2014 as against Rs108 during the preceding year.
Analysts said many foreign players reviewed their geographical footprint, especially in offshore markets, leading to renewed M&A activity in small countries like Pakistan.
Dr Muhammad Yaqub, former governor State Bank found privatisation of domestic banks made them more efficient and competitive, driving the foreign banks out of the market.
“I think economic slowdown, increased insecurity and lawlessness made Pakistan a less attractive place for foreign investors to do business,” he said. “The Islamic mode of banking provided an edge to domestic and foreign Islamic banks, excessive government bank borrowing led to replacement of lending to private sector by the government treasury papers as the main business, which is more suited for domestic banks,” Dr Yaqub said.
He further said that foreign buyers from the Middle East took over some large banks through privatisation reducing the usefulness of foreign banks.
Moreover, financial recession in the recent past made foreign banks more cautious and so on.
There are five foreign banks operating in Pakistan: Bank of Tokyo, Citibank, Deutsche Bank, Industrial and Commercial Bank of China and HSBC Bank Oman.
When asked, the regulator of the banking system—State Bank of Pakistan (SBP) said, “This view is not based on reality. During the last five years or so, a foreign banking company viz Industrial and Commercial Bank of China opened banking business through establishment of their branches in Pakistan.”
“Similarly, in the past we have seen entry of renowned banks and financial institutions through acquisition of sponsors/substantial shareholding in our local banks and they are still continuing with their investment. Examples are Malayan Banking Berhad (Malaysia), Bank Muscat, Namura (Japan), Samba (Saudi Arabia), Temasek (Singapore), IFC (World Bank) etc.”
The central bank pointed out the entry and establishment of international micro-financiers. “Further, foreign players such as FINCA and ADVANS have entered the microfinance sector through the establishment of microfinance banks. The interest shown in the recent divestment of government’s shareholding in Allied Bank, United Bank and HBL and other privatisation transactions is a testament that our regulatory requirements as well as economic conditions are conducive to the international investors in financial markets.”
However, the central bank admitted, “It is correct that in the past few years two foreign banks with a few branches exited the Pakistani market. But such exits were not limited to Pakistan only, rather, those banks also wound up operations from several other parts of the world as well as a part of their global strategy.”
“The reasons for their closure were change in their group strategy focusing more on local market than abroad. Basel III implications, especially the road map for banks on capital adequacy in terms of risk weightings on various categories of assets, also appear to prod large banks to confine their operations to their core geographic locations,” it mentioned.
“SBP and government of Pakistan encourage any investment by foreign investors in banking/other sectors.”
Many commentators believe the banking industry of Pakistan is going through a phase change. Foreign banks seem to be losing interest, while Islamic banking and finance is growing significantly.
A Shariah-compliant interest-free Islamic finance accounts for nearly 10 percent of the country’s banking system. The reason for this growth—what the commentators attribute is ‘satisfied customers’ and not being affected by ‘crisis.’
Presently, out of the total 37 banks, 22 Islamic banking Institutions are operating in the country.
Analysts say that though the foreign banks became minor players in the local financial market, the existing banks seem to remain relevant and maintain the level of financial services and market share.
Foreign banks started shrinking their penetration in 2010. A Bahrain-based financial group purchased the business operations of Royal Bank of Scotland. Earlier, RBS had absorbed the Dutch Abn-Amro within its folds.
HSBC Bank Middle East declared its plan to wrap up operations—the dominant lender to go for in 2012. Soon after, Citibank announced its intention to divest its consumer portfolio in what was seen as the prelude to the US bank’s exit from the Pakistan market. HBL acquired Citi’s consumer loan book while Bank Islami grabbed the housing loans portfolio.
Meezan Bank—the largest Islamic bank in the country had merged HSBC Middle East into its Islamic banking portfolio last year.
This month Barclays, a British multinational bank, has divested from Pakistani banking, as it was acquired by local privately-run largest bank—HBL.
The writer is a staff member
