Change is afoot in Pakistan’s banking sector

Pakistan’s economy presents great opportunities for the banking sector. Habib Bank is hoping to bring an end to its unbanked masses

Karachi, Pakistan. The country’s economy has presented many opportunities for the banking industry, creating more options for the public to find a secure institution to bank with 

Now that Pakistan stands at the cusp of socio-political and economic change, it is the ideal opportunity for the banking sector to redress the lack of outreach towards sections of the population that were hitherto excluded from the formal financial sector, or did not have the knowledge to utilise banking services.

Indeed, it is a very real appreciation of impediments at the grassroots level that has driven Habib Bank Limited (HBL) to expand its product line to especially cater to the low-income population of the country, which would have otherwise remained disenfranchised from the national economy.

Hence, HBL has made a conscious effort to ensure delivery of financial services to this segment by streamlining products, policies and procedures to enable financial inclusion. As such, most of the initiatives HBL has undertaken have been ground breaking in both scope and outcome, and their key focus has been easing the transition from conventional methods of money handling towards more reliable, convenient and trustworthy avenues.

Getting banks up to speed
Another shift that has been witnessed by the industry is the exit and scale down of various foreign banks operating in Pakistan. This provides an opportunity for local banks to reach out to global corporates that seek a certain standard of service and technology.

HBL has been very successful at capitalising on this market opportunity with a majority of large local and multinational corporations now utilising HBL banking services. HBL has also strategically acquired the retail operations of Citibank, and recently the entire operations of Barclays Bank in Pakistan.

As far as performance is concerned, the banking sector is one of Pakistan’s best performing industries, with its assets rising to approximately $129bn between Q2 and Q4 of 2015. Its profitability remains high and the industry’s key performance indicators for nine months of 2015 displayed a robust picture.

The capital adequacy ratio, a measure of solvency, stands at 18.2 percent, which is well above the benchmark of 10 percent set by Central Bank of Pakistan and international standard of eight percent. All in all, the sector is going from strength-to-strength, with this trend likely to continue into 2016 and beyond.

Islamic financing
Pakistan was among the first three countries to attempt to implement Islamic financing at a national level, and its origins date back to the 1970s. Today, Pakistan has six dedicated Islamic banks and almost all the commercial banks have Islamic divisions that provide sharia-based solutions to their customers. The emergence of Islamic finance in Pakistan has led to greater financial inclusion for a large segment of the population awaiting sharia-based products.

The emergence of Islamic finance in Pakistan has led to greater financial inclusion for a large segment of the population awaiting sharia-based products

Sharia compliant financial products and services are more acceptable to this segment of the population and as these products are becoming popular and more common, there has been remarkable migration of accounts from the conventional banking system to the Islamic mode of financing along with the opening of new accounts.

Islamic finance’s emphasis on asset-backed financing and its risk-sharing feature also means that it could provide support for SMEs, as well as investment in public infrastructure. Very recently Pakistan has launched an Islamic Index at the Karachi Stock Exchange (Pakistan’s largest stock exchange), so as to enable trading of shares according to sharia.

The Central Bank has also laid out a separate prudential regulatory and supervisory framework and a Sharia Advisory Board, which approves broad policy, regulatory framework, and new Islamic finance products. HBL has also actively pursued the development and availability of Islamic sharia compliant products through its Islamic window operation, and in a short span has become the second-largest Islamic banking provider in the country.

Tech injection
Globally, the financial services industry is undergoing massive change in response to the challenges posed by the regulatory environment and the exponential evolution of technology. Regulators across the world are becoming more sophisticated and intrusive, while simultaneously becoming less tolerant of gaps, forcing banks to invest heavily in compliance resources and systems. This is causing a drag on returns and taking significant management time as they comply with stress tests, respond to regulatory investigations or manage increasingly punitive fines.

Amid this pressure, non-bank financial institutions – especially start-up technology firms that are not subject to the same financial pressures or regulatory supervision – are offering competing services to bank clients. This has created opportunities for new challengers, who are nimble, more efficient and have niche specialisations to disrupt traditional business models and penetrate new markets with highly targeted products
and services.

This is creating pressure for the unbundling of the traditional universal financial services model, and disaggregating customer relationships, in direct contrast to banks’ objective to capture an ever-increasing share of the average wallet. Traditional banks run the risk of being left with the ownership only of manufacturing products.

Emerging innovations based on leveraging advanced algorithms and computing power are automating activities that were once highly manual, allowing cheaper, faster, and more scalable products and services. They are giving customers more visibility into products and more control over choices. Social media companies with a huge user base are moving into the financial sector, bringing new sources of capital and investment.

Customers are now interacting with financial institutions online, using social media to connect, communicate or complain. They do not have traditional customer loyalties and banks will be forced to rethink their interaction with this growing target segment.

HBL has been spending heavily on upgrading internal systems as well as providing customers with new ways to interact with the bank, and we expect to be able to continue to provide reliable, low cost, and innovative solutions to customers throughout the banking spectrum.

An economic corridor
The China-Pakistan Economic Corridor (CPEC) is of huge significance to both countries not only in terms of its impact on the Sino-Pak polity but also through the multitude of economic benefits that it seeks to provide for both countries. The CPEC entails construction of textile garment parks, ventures in the energy sector, development of coal mining projects, construction of dams, installation of nuclear reactors, and creating a network of roads, railway lines and oil and gas pipelines.

Earlier in the year Pakistan signed agreements with China to secure investment for the CPEC, which would be to the tune of $46bn. There are around 51 agreements, out of which work on eight projects has commenced and the foundation stones of five have been laid. One obvious benefit of the CPEC is a reduction in unemployment, once the Gwadar Port is functional and once trade commences business activities in Pakistan will get a much needed boost.

It has also been reported that once the corridor is functional it would generate significant transit fees (estimated at approximately $70bn per annum) on Chinese cargo transported through CPEC on the Kashgar-Khunjrab-Gwadar route.

HBL was the first to realise the importance of the role that China has to play in the development of Pakistan, and has been working to get necessary approvals for opening a branch in China, which is expected before the end of 2016. HBL’s investment banking team is the recognised project finance and advisory team for CPEC transactions, and this is evident in the number of CPEC transactions that are at an advanced stage of development and execution by the team. We feel that CPEC will be a major driver for growth in the five to 10 year horizon, both in terms of GDP as well as banking sector growth.

Taking a further look ahead
With a dynamic strategy that is continuously addressing the changing customer needs, over time HBL has improved its branch infrastructure, broadened its product offering and focused on customer experience. Training and improving the bank’s service are key elements of its culture. The bank’s vision of “enabling people to advance with confidence and success” is embedded in every communication platform and is central to building the bank’s brand across its global network.

HBL has recently launched a female finance initiative called HBL NISA, in collaboration with the International Finance Corporation (IFC). The objective of the programme is to increase female financial inclusion, to help advance and elevate women in Pakistan’s society. The company leads the way in rural financing and is focused on continually expanding its asset base.

Over the last two years, HBL has achieved year-on-year growth of 20 percent in rural banking, with a well-managed credit quality. Its long-term objective is to create banking awareness and promote savings culture among the rural communities, and to provide banking solutions to the rural customers as per their needs and financial aspirations, and to establish a mutually beneficial banking relationship with rural customers.

The Corporate and Investment Banking Group continues to be one of our core focus areas, emerging as a crucial tool enabling HBL to forge a pioneering path in the local banking industry of Pakistan. The company has established and maintained a leadership presence in the local equity and advisory, debt, syndications and project finance markets.

Innovative, ground breaking, and unique financial solutions for multiple business segments are the key reason why HBL remains the bank of choice for major local and multinational companies doing business in Pakistan.