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Making banks “financial super markets’

Published on 17th Nov, Edition 46, 2014


After the un-ceremonial demise of DFIs and Investment banks, commercial banks have been undertaking many activities, which are not part of their prime mandate. They also undertake medium and long term financing that is not the role of commercial banks. However, to make it look more prudent some of the commercial banks have established fully-owned subsidiaries to undertake ‘other business’ that include insurance, asset management, leasing and Modarabas.

This may look a little odd to those who believe that commercial banks should remain confined to their prime mandate. However, this is not odd because after the Second World War some of the commercial banks virtually became owners of commercial entities. A few are still folding the forte. Therefore, commercial banks in Pakistan should also be encouraged to establish subsidiaries to undertake any and every business. Their primary role should be to provide initial paid up capital and also help in mobilizing funds by offering shares of these entities to general public.

This is not any novel idea but PICIC, basically a DFI, emerged as a financial super market in the recent past. Its subsidiaries included a commercial bank, an insurance company and an asset management company. It may have become a bigger entity has it was not taken over by another bank enjoying support of a foreign investor. PICIC may have witnessed un-ceremonial demise but its business model is being followed by even some of the best known business groups.

Nishat Group, previously known for its textiles and clothing business diversified business by acquiring a cement company and a commercial MCB Bank. They also attained majority stake in Adamjee Insurance, the group already had a captive insurance company. It also ventured into asset management business and also established IPPs, after running captive power plants for reasonably long time.

Creation of captive insurance companies allows the bank to hedge risk in a better manner but these companies are not taking active part in credit insurance of the amount lent to farmers. Almost all the leading commercial banks, with the exception of National Bank of Pakistan (NBP) have their own captive insurance companies but ‘crop insurance business’ rests with a few companies. It may be pertinent to highlight that the public sector non-life insurance company, National Insurance Company (NIC) faces delinquency because the government has failed to manage its affairs prudently.

Commercial banks have invested huge amount in the creation of asset management companies as well investing in funds managed by these companies. It may not be wrong to say that mutual fund business suffer from stagnation. This is evident from the quantum of assets under management that have hovered around Rs400 billion. The recent hike was only because of investment in Sovereign Ijarah Sukuk by the Islamic mutual funds. The prevailing condition may also be attributed to listing of only a few companies after the 2008 financial crisis. Though, the KSE-100 has crossed 31,000 barrier, the quantum of listed capital has not increased correspondingly. If a few companies are listed and fewer TFCs are issued the size of assets under management is not likely to increase.


Since banks have trillions of rupees deposit these are in an ideal position to facilitate in the creation of new businesses. It is being said that some of the bigger banks are not keen in accepting deposit because they find limited investment avenues. Though, banks have invested heavily in high yielding and risk free government securities, many of the experts are critical of the situation. Banks have also invested in shares of listed companies that are beyond the benchmark followed in other countries.

Experts say that banks exposure in the shares of listed companies should be brought to half of the existing quantum.

This raises a question, where should the bank invest tons of deposits they have? Almost all the commercial banks have Investment Banking or Corporate Finance departments. However, they just sit and wait for the clients. May be the time has come that these people go two steps forward: 1) identify investment opportunities and 2) prepare pre-investment feasibility reports. This will develop confidence in lending as they already know the ground realities.

It may not be out of place to say that SBP has embarked upon Warehouse Receipt Financing program. The pilot project was scheduled to commence operation in June this year but all in vain. Receipt financing can’t be started unless there are warehouses and collateral management companies. The reality is that Pakistan produces around 40 million staple food grains but there exists less than 6 million tons storage facilities. Since banks are already involved in extending funds through hypothecation of stock, manage/supervise warehouses through Muqqadam, receipts financing in a few produce can be started without any further delay.

Banks are given annual agri lending targets and allocating about 5 percent of this amount for construction of modern warehouse and collateral companies will help: 1) central bank in pursuing its financial inclusion program by freeing the farmers from the clutches of informal lenders, 2) saving 20% of the produce that goes stale before reaching the market, 3) help the producers get better return for its produce and 4) enable the country to earn extra foreign exchange by exporting the surplus quantities.
It is also necessary to highlight that despite having trillions of deposits banks have failed in developing housing finance business. This is mainly because banks are not allowed to make long term lending of up to 20 years due to the nature of the deposit they maintain. However, if 5 percent of the total banking deposits is deployed for housing, it should not pose any problem. All the banks should be asked to have stake equivalent to 5 percent of the deposit to create a new housing finance. The holding in this company should also be considered as part of SLR kept with the central bank. Banks undertaking leasing became a reason for the downfall of leasing companies.


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