BankAlHabib for Micro Economic With Alteration Offacts and f

8/9/2019 BankAlHabib for Micro Economic With Alteration Offacts and f

1/67

INTRODUCTION

I NTRODUCTION

A. BRIEF DESCRIPTION OF BANKING SYSTEM

Financial reforms introduced in 1990 have liberalized Pakistan's banking sector, which had long been

dominated by state-owned banks, and private banks are gradually playing a more significant role. The

government of Zulfikar Ali Bhutto nationalized all Pakistani banks on January 1, 1974 (two foreign, but non-

U.S. banks, in operation at the time escaped nationalization). In December 1990, the GOP announced

plans to privatize state-owned banks and to allow the establishment of private domestic banks. So far the

government has privatized two formerly nationalized banks, Allied Bank Limited and Muslim Commercial

Bank, and the State Bank of Pakistan has granted licenses to 14 new private banks. The GOP has

announced its plans to privatize Habib Bank by September 1998. Habib Bank is the country's largest

commercial bank in terms of assets.

There are 25 Pakistani commercial banks, with over 8,500 branches nationwide. These banks account forabout 75 percent of total commercial bank assets. Twenty-one foreign commercial banks--of which three

are American--with 87 branches, also do business in Pakistan. Foreign banks are permitted to engage in a

full range of banking activities. Foreign banks are subject to higher withholding taxes than Pakistani

banks, but this gap is gradually being closed. Most foreign banks may not establish more than four

HIMS CITY 1


2/67

INTRODUCTION

branches, though at least one exception has been granted to this general rule. Otherwise foreign banks

are accorded essentially the same treatment as Pakistani banks.

Bank Assets - U.S. Presence - The three U.S. banks operating in Pakistan--Citibank, American Express Bank,

and Bank of America-- accounted for seven percent of all commercial bank assets in 1994. All three U.S.

commercial banks currently operating in the retail market (and almost all other foreign banks in Pakistan)

are branches rather than wholly owned subsidiaries. (Although there is no requirement that foreign banks

operate as branches, the wholly owned subsidiary format would require them to offer shares for sale to the

public at prices below the true market value). Citibank is the largest foreign bank operating in Pakistan.

The U.S. banks have, in general, been selective in their choice of customers, and as a result have what

most observers would agree is a quality client base. Like all other commercial banks in Pakistan, their

major activity is business lending; the U.S. banks have a relatively high percentage of multinational

corporations as clients. Citibank, however, also pioneered the development of consumer banking in

Pakistan and in 1993 became the first commercial bank to offer a comprehensive program for automobile

loans and individual mortgages.

Commercial banks are engaged predominantly in corporate lending, with the state-owned and newly

privatized banks involved in various forms of concessionary lending. The commercial banks are the main

sources of short - and medium-term credit for domestic investment.

HIMS CITY 2


3/67

INTRODUCTION

Consumer banking in Pakistan is largely undeveloped. There is no tradition of lending to small individual

consumers, and purchases of automobiles, housing, and consumer goods are generally made on a cash

basis. Foreign banks generally have sufficient lucrative business in the corporate sector to absorb theirlimited credit reserves. High interest rates combine with high start-up costs to discourage initiatives in the

consumer sector.

The State Bank of Pakistan, the central bank, controls the money supply and credit, supervises the

operations of banks, administers the country's international reserves, and acts as banker to the federal

and provincial governments. The SBP formerly set maximum lending rates for commercial banks. As part

of its move toward more indirect methods of control, however, the central bank in March 1995 eliminated

this ceiling.

The GOP has pursued a policy of prescribing target levels of lending to certain sectors of the economy; to

ensure that priority sectors receive adequate credit. The credit targets apply only to state-owned banks.

The GOP sets targets for agriculture, small-scale agriculture, small business and industry, and tobacco

marketing. The GOP has also mandated a program of concessionary credit to the private sector through

state-owned commercial banks. It provides concessionary credit for export finance, locally manufacturedmachinery, and agricultural production loans to small farmers. The export finance scheme is available to

all commercial banks. However, private banks generally make little use of this program and the state-

owned and newly privatized banks dominate lending under the export finance scheme.

HIMS CITY 3


4/67

INTRODUCTION

In September 1993, the Pakistan Banking Council estimated that the total volume of overdue loans from

the commercial banks as well as non-ban financial institutions was 81 billion rupees (about $2.7 at mid-

1994 exchange rates). The defaulted loans are held almost exclusively by the three largest state-ownedbanks, and by the two newly privatized Pakistani banks; according to the State Bank Governor, bad loans

make up from 10 to 30 percent of these banks' loan portfolios. In contrast, foreign banks, including U.S.

banks, have had few defaults and have enjoyed profitable operations.

There is no system of deposit insurance in Pakistan, although the State Bank and the Pakistan Banking

Council have considered instituting such a system. Foreign banks have reacted cautiously to proposals to

establish a system of deposit insurance, because they fear having, in effect, to subsidize the state-owned

and newly privatized banks that hold far weaker portfolios. If a deposit insurance system is proposed in

which each bank is required to contribute in proportion to its assets, foreign banks can be expected to

oppose such a system vigorously.

In 1979, Pakistan began a program of bringing its financial sector into conformity with Islamic economicprinciples by taking steps to eliminate interest. The two cornerstones of this policy are the use of the

"mark up" system in bank lending and "profit and loss sharing" (PLS) for bank depositors. These two

systems are now used for all rupee accounts in commercial banks; foreign currency accounts are still

based on interest-bearing precepts.

HIMS CITY 4


5/67

INTRODUCTION

Under the mark up system, the lending institution in effect purchases a share of the borrower's assets,

with an agreement to sell back the assets when the loan falls due, at a fixed price, including the "markup". If the borrower is unable to pay when the loan falls due, the loan can be "rolled over", by extending a

new loan for the amount of the original loan plus the previously agreed mark up amount. One shortcoming

of this system is that non-performing loans can be "rolled over" indefinitely, so that a bank's balance sheet

may not accurately reflect the viability of its outstanding loans. Under the profit and loss sharing system,

banks declare a return on deposits periodically, based on the profits actually earned on PLS deposits.

Because banks could theoretically suffer a loss, this means that depositors' principal as well as return are

both at risk under the PLS system. In practice, banks announce expected PLS rates in advance, so

depositors have a good estimate of their rate of return before making a deposit. The range of rates paid

on PLS deposits is quite wide.

The Islamic Shariat Court in 1990 struck down 22 banking and financial laws because they condoned the

payment of interest, which is expressly forbidden under Islamic law. The government, along with foreign

and some Pakistani banks, has appealed the Shariat Court's decision to the Pakistan Supreme Court,where the case is pending. However, the second Nawaz Sharif government decided to withdraw

government's appeal in 1997 and let the court decide the case on merit. The Supreme Court has yet to

resume hearing of this case. A decision is not expected in the near future.

HIMS CITY 5


6/67

INTRODUCTION

A decision by the Supreme Court to uphold the Shariat Court ruling and insist on the elimination of all

forms of interest would have a significant impact on the banking system. A ruling altering the current

mark up system or making foreign currency accounts subject to the mark up system would force U.S.banks to reassess their operations in Pakistan. U.S. bankers suggest that any system requiring the lending

party to take an equity stake in the borrower would cause problems for most foreign banks. However, most

observers expect that a workable compromise will be reached, permitting foreign banks to continue

operating much as they do now.

In a major move towards market-based monetary management, the State Bank of Pakistan removed the

cap on lending rates in March 1995, and waived mandatory, Credit Deposit Ratio (CDR which links the

amount of advances to the level of deposits) in September 1995. Removal of CDR was followed by

market-based "Open Market Operations (OMO's - measure to mop-up excessive liquidity)", in order to

restrict expansion in private sector credit according to the annual Credit Plan target. The statutory

liquidity requirement that the commercial banks must maintain with the State bank was lowered from 30

percent to 25 percent in May 1997 (20 percent to be invested in government securities and 5 percent as

cash deposits).

Commercial banks face considerable competition in attracting deposits from individuals or small investors;

the GOP's national saving scheme offers attractive rates of return (in the 16 to 18 percent range) on small

accounts, which banks find difficult to match. The corporate bond market is still in its infancy in Pakistan;

HIMS CITY 6


7/67

INTRODUCTION

if this form of financial instrument becomes better developed, banks may also face more difficulties in

attracting deposits from businesses. With increasing competition from more efficient private banks,

portfolios with a significant volume of bad loans, and the prospect of lowered mark up ceilings, the state-owned banks will face particular difficulties in attracting new deposits.

Other financial institutions operate in specialized areas. For example, the Agricultural Development Bank

of Pakistan (ADBP) provides credit facilities to farmers and cottage industries in rural areas. The Industrial

Development Bank of Pakistan (IDB) provides loans to small and medium-sized industrial enterprises in the

private sector. The Investment Corporation of Pakistan (ICP) was established to encourage and broaden

the base of investments and to develop the capital market. The Pakistan Industrial Credit and Investment

Corporation Limited (PICIC) is concerned with financing new industries and providing funds for the

modernization of existing industries in the private sector.

B. FOREIGN EXCHANGE CONTROLS AFFECTING TRADING

Pakistan's exchange rate policy is presently based on a managed float, with the State Bank of Pakistan

regularly adjusting the value of the rupee against a basket of major currencies and using the U.S. dollar as

the intervention currency.

HIMS CITY 7


8/67

INTRODUCTION

In recent years, the GOP has significantly liberalized foreign exchange controls. Individuals and firms in

Pakistan may now hold foreign currency bank accounts and may freely import and export currency.

Foreign firms (other than banks) with investments in Pakistan may remit profits and capital without priorSBP approval. The government in 1994 made the Pakistan rupee fully convertible for current account

transactions. However, exporters must still sell their foreign exchange earnings to the State Bank of

Pakistan.

C. GENERAL AVAILABILITY OF FINANCING

Pakistan's banking sector offers a full range of services, including foreign trade and working capital

financing, term finance facilities, and retail banking. Letters of credit can be routed through the local

banks having overseas networks (foreign exchange transactions are conducted by the bank with overseas

affiliates). Since credit targets are controlled by the central bank, it sometimes is desirable to work withseveral banks in order to satisfy borrowing requirements. All borrowing from the commercial banks is, in

theory, conducted on a secured basis, since unsecured borrowing is not permitted.

HIMS CITY 8


9/67

INTRODUCTION

In addition to the commercial banks, Pakistan has about 16 specialized banks and development financial

institutions. The National Development Finance Corporation (NFDC), the Pakistan Industrial Credit &

Investment Corporation (PICIC) are the leading development finance institutions (DFIs) providing mediumand long-term loans in both rupees and foreign currency to the industrial sector. Their services include

participation in equity through ownership of shares and debentures, underwriting public issues of shares

and securities, assisting Pakistani investors to obtain foreign investment, assisting foreign investors to

locate suitable investment opportunities in Pakistan, and providing technical and managerial advice and

assistance.

There also are about 12 investment banks, over 50 modaraba companies (see description below), and over

24 leasing firms, all of which have filled a major gap in the country's financial services sector through the

provision of a wide range of investment banking services. Through affiliation with major international

financial institutions, investment banks, in particular, have been able to transfer financial "know-how" and

technology to the local markets.

The specialized banks include Saudi Pak Investment Company, Pak Kuwait Investment Company and PakLibya Holding Company, all of which are joint ventures providing term financing and equity support

facilities. In addition, there are the National Investment Trust (NIT), an open-ended mutual fund, and the

Investment Corporation of Pakistan (ICP). Both are large investors in the stock market and provide

financing for major projects.

HIMS CITY 9


10/67

INTRODUCTION

Foreign investors may also utilize the stock market to raise capital. There are over 775 companies listed

on the Karachi Stock Exchange. Islamic Modes of Financing - Some of the Islamic modes of financingavailable to both domestic and foreign investors (in accordance with regulatory requirements) are:

Working Capital Finance - "Morabaha": Under Morabaha the banks provide working capital finance which

may be drawn (by checks) and credited on a daily basis with the facility of an overdraft account.

The pricing (of debit balances) is calculated on a daily basis at a rate agreed between the borrower and

the bank according to financial market conditions. Essentially, the bank and borrower affect a sale and

purchase (in respect of the assets which form the bank's security), and the difference between the

purchase and sale price establishes the mark up.

"Musharika" is another form of working capital finance by way of a "partnership" between the borrower

and lender based on a profit and loss sharing agreement. Working capital finance may also be provided

through discount of bills of exchange.

Term Financing - Term financing is available through a mechanism known as a Term Finance Certificate

(TFC). TFCs are typically used to meet the medium and long-term financing requirements of new projects

when the borrower actually sells his project assets

HIMS CITY 10


11/67

INTRODUCTION

to the financing institution. Each certificate represents a definite sum of money, and is transferable in the

same way as a bond. The borrower's purchase consideration is a fixed installment of payment over the

financing period represented by the TFCs. The rate of return to the financial institution is derived from themarked-up amount of the resale price to the borrower. The mark up rate is determined in accordance with

financial market conditions, and is agreed between the bank and the borrower when the facility is

negotiated.

HIMS CITY 11


12/67

SITUATION IN PAKISTAN

S ITUATION IN PAKISTAN

P akistans financial sector comprises of banking and non-banking institutions. All public sectors, privateand foreign banks come under the head of banking institutions while the NBFIs include development

finance institutions (DFIs), investment banks, leasing companies and modarabas.

The Government of Pakistan today dominates the banking industry as even today they hold a major chunk

of stakes with them. The stakes of the banks that the Government of Pakistan enjoys comes divisioned

from the five large banks namely, Habib Bank, United Bank and Muslim Commercial Bank, Allied Bank that

till recently move privatized in 1992 by the Privatization Commission. These large banks even today

collectively accounts for 77% to 78% of total deposits and advances.

In comparison to the privatized banks the sector banks have however been less profitable although these

private sector bank have been recent addition to the banking industry. This industry was too limited to

banking services that were available till the Nawaz Regime. Government opened doors to the privatesector banks, soon there was an infusion of banks opening and the stock market experienced a

devastating shift to the flotation of shares. These banks were Bank Al Habib, Schon Bank, Metropolitan

Bank, Muslim Commercial Bank, Prudential Investment Bank, Soneri Bank, Bolan Bank, Mehran Bank, Indus

Bank, Prime Bank, Union Bank and Platinum Commercial Bank. These banks started operations but being

HIMS CITY 12


13/67


new for the investors took time to gain ground. Initially all banks started with a very small network with

concentration to the selective market. This was indeed a very prospering sign for them and despite the low

turn out by the investors today they account for 22% of the total sector.

This merely resulted due to the consistent public sector bank inefficiencies, which were a gradual result

stammering from the nationalization book in the 70s. Since then the foreign banks have been able to

perform relatively well by exploiting gaps in the local banking sector.

The network of foreign banks today have a strong presence in all the major cites their strategy is quite

successful as they account for 34% of total sector profits, despite having only 15% of deposits and 16% of

advances. Lately in just four years the banking industry has expanded tremendously. Now in times of slow

economic activity and high inflation as is the case with Pakistan, the financial sector as a whole is likely to

experience depression with shrinking interest margins and troubled assets because of the deteriorating

bad debts. This recent mushrooming of banks in the country has boosted this sector a lot and has become

a bone in the growth of the economy. Unfortunately the growth in the industry has been slow and hence

banks have had a fight for customers.

The race for intensifying deposits has already started and the trend in 1996 shows that people are moving

away from long term deposits making it increasingly difficult for the smaller banks to develop a strong

deposit base. With the economy so far not showing any substantial and fundamental improvement and

HIMS CITY 13


14/67


with retardation in industrial growth, banks should not be looking at a significant growth in the short tern.

However, with prospects of an improvement in the operational side as well as the hope that industrial

growth will pick up, banking is looking at a bright future in the Country.

HIMS CITY 14


15/67

INDUSTRY ANALYSIS

I NDUSTRY ANALYSIS

HISTORY

The economy of Pakistan is passing through a difficult and trying phase in the post-blast scenario and the

political instability. The financial services sector and its sub-sectors - commercial banks, leasing

companies, mutual funds, and investment banks are operating in an environment of increasing

competition and uncertainty.

Banks play an important role in the economic development and facilitate international trade. The bankingsector in Pakistan is dominated or led by the nationalized commercial banks (NCBs). These are Habib Bank

Limited (HBL), National Bank of Pakistan (NBP), United Bank Limited (UBL), newly privatized Allied Bank

Limited (ABL) and the Muslim Commercial Bank Limited (MCB). However in the past decade under the

financial liberalization and deregulation policies of the democratic governments there have been massive

banking sector reforms and private sector banks have been set up. Foreign banks have also been

operating profitably by offering their niche customers high service standards and by introducing latest

banking technology to the local market. The local customers have welcomed the availability of choices,

however on the other hand this has led to an over-banked economy. The past account of industry situation

is as follows:

HIMS CITY 15


16/67

INDUSTRY ANALYSIS

1940s:

Prior to partition in 1947, branches of British banks dominated banking in Pakistan. The first banking

domestic institutions emerged in the 1940s, immediately preceding or shortly after Pakistansindependence from Britain. These institutions include Australasian Bank (today: Allied Bank Limited or

ABL), Habib Bank Limited (HBL), Muslim Commercial Bank (MCB), and the National bank of Pakistan (NBP).

Except for the NBP, which was wholly government owned, the other three banks were established by

prominent merchant families.

1948:

The SBP or State Bank of Pakistan (the central bank) was formed after partition. It assumed thesupervisory and monetary policy powers of the State Bank of India.

1959:

United Bank Limited (UBL) was formed.

1960/70s:

The emergence of a number of specialized development finance institutions (DFIs) such as Industrial

Development Bank of Pakistan (IDBP) and the Agricultural Development Bank (ADB). These DFIs were

either controlled directly by the state or through the SBP, and were intended to concentrate on specific

priority sector lending.

HIMS CITY 16


17/67

INDUSTRY ANALYSIS

1974:

The government of Zulfiqar Ali Bhutto nationalized all domestic commercial banks. The Pakistan Banking

Council (PBC) was established, which assumed the role of a bank holding company but with limitedsupervisory powers. However, PBC was dissolved in 1997, leaving the SBP as the sole regulatory authority

for banks and financial institutions in Pakistan (leasing companies and modarabas are now regulated by

Corporate Law Authority). Nationalization of the banking sector lead to significant government interference

and resulted in directed lending to pet projects. The branch network of NCBs also proliferated in an effort

to provide banking services to all regions/territories of the country, often with disregard to the viability or

feasibility of such expansions.

1991 92:

Deregulation of the financial sector and capital markets led to mushrooming growth of banking companies

in the private sector. Several big industrial groups set up their own banks, which to date remain relatively

small compared to the NCBs and other large foreign banks.

DEVELOPMENTS IN THE BANKING INDUSTRY

The adverse impact of sanctions, suspension of multilateral lending, downgrading by some international

credit rating agencies, reduction in net foreign investment and low foreign exchange reserves needed to

be countered. Measures were taken to diminish the impact of restrictions imposed on withdrawals from

HIMS CITY 17


18/67

INDUSTRY ANALYSIS

foreign currency deposits; adjustment in exchange rates, tightening of exchange controls. Liquidity in the

financial sector was regulated so as to stimulate the demand for domestic credit. These monetary and

credit control regulations included gradual reduction in the discount rate from 16.5 percent to 13 percentand subsequently the minimum rate of return to be paid on financing facilities from the State Bank and 3-

day Repo facilities against Government Market Treasury Bills and Federal Investment Bonds was reduced

from 13 percent to 11 percent.

Changes in the liquidity ratio maintained by non-banking financial institutions were made as and when

required. The State Bank amending its Export Finance Scheme so that effective from January 1, 1999 small

and medium exporters and indirect exporters were made eligible for financing under the scheme, theState Bank issued new directives on the minimum margin restriction on import letters of credit. Initially,

there was a 10 % cash margin requirement on import letters of credit for the import of industrial raw

materials, 20 % on import letters of credit for the import of machinery and spare parts and 35% cash

margin.

The State Bank reduced Statutory Liquidity Requirements (SLRs) of banks from 15.0% to 13.0% and Cash

Reserve Requirements (CRR) from 5.0% to 3.5% on May 19, 1999. Banks and financial institutions were

allowed to introduce viable new products to regain some of the outflow resulting from withdrawals from

frozen foreign currency accounts (FCAs). In the process, banks introduced lottery schemes attracting

criticism from various quarters. Accordingly, the State Bank decided on investment banks including NBFIs

were restricted from undertaking repo transactions with scheduled banks against there holding of

HIMS CITY 18


19/67

INDUSTRY ANALYSIS

Government securities since 26 th June 1996. Overall, private sector credit expansion has been sluggish and

the slowdown in economic

SOME INDICATORS IN BANKING INDUSTRY:

Pakistan has one of the lowest literacy rates in the world. The high level of illiteracy has hampered proper

documentation of all economic activities. Loose monitoring of laws has enabled a lot of people to not

report their economic activities properly. Consequently, a huge portion of economic is undocumented.

Along with this, Pakistan has failed to develop a culture of savings. The official savings rate has been

hovering between 13 to 15 percent.

Low saving rates coupled with high level of informal economy makes our economy an un-banked economy

compared to other countries. This can be tipped as a great opportunity problem for banks to capitalize

upon. Banking industry can increase its efforts to create awareness among people about the usefulness

and the advantages of the banking services and so, can increase their customer base along with finding

ways to grow sustainability. The government also has to expedite its efforts to increase the level of

documentation in the economy.

REGULATORY AUTHORITIES

The financial sector in Pakistan is regulated by:

The State Bank of Pakistan

The Securities and Exchange Commission of Pakistan

HIMS CITY 19


20/67

INDUSTRY ANALYSIS

The Ministry of Finance, Government of Pakistan

The State Bank is the central bank of Pakistan and sets rules and regulations with regard to the operation

of banks. The Securities and Exchange Commission of Pakistan is the authority for all capital related issues

in the corporate sector. The Commission also monitors the non-banking financial institutions. The Ministry

of Finance, Government of Pakistan, is the licensing authority in the banking industry and forms policy

guidelines for the financial sector.

GOVERNMENT REGULATIONS:

The State Bank of Pakistan, the central bank, controls the money supply and credit, supervises the

operations of banks, administers the country's international reserves, and acts as banker to the federal

and provincial governments. The Government of Pakistan has pursued a policy of prescribing target levels

of lending to certain sectors of the economy; to ensure that priority sectors receive adequate credit. The

credit targets apply only to state-owned banks.

The GOP has also mandated a program of concessionaire credit to the private sector through state-ownedcommercial banks. It provides concessionary credit for export finance, locally manufactured machinery,

and agricultural production loans to small farmers. The export finance scheme is available to all

commercial banks. However, private banks generally make little use of this program and the state-owned

and newly privatized banks dominate lending under the export finance scheme.

HIMS CITY 20


21/67

INDUSTRY ANALYSIS

Some important decisions, which shaped the structure of financial systems in the present form, were taken

earlier years. Since its inception in 1948, SBP accepted the responsibility for the development of efficient

financial structures. Initially National Bank of Pakistan was established in 1949 because commercial banks

catering to the credit requirements of commerce were disarrayed at the time of partition. Moreover

separate banking and non-banking development finance institutions were setup:

i) To provide medium and long- term finance to industry, agriculture and housing;

ii) To lend support to shares and securities market; and

iii) Later on to provide finance to small man, less developed areas and women 1 .

On top despite collapse of the banking system at the time of partition, SBP refused to allow foreign banks

to open their branches in the interior of country and required them to confine themselves to port townswhere foreign trade was concentrated. But this policy of Government that banks with branches all over the

country should be owned and run by Pakistani themselves have reversed in recent years as HBL, UBL, ABL

etc. were put to sale and might be handed to over foreign parties if their bids are higher. Whatever the

reason of this reversal of policy, economic independence of the country has been put at stake.

COMPETITORS

Competition system in banking is very complex in Pakistan. Pakistans financial sector consists of

Scheduled Commercial banks, which include nationalized, foreign, and private banks; Non-Banking

Financial Institutions (NBFIs) that include Development Finance Institutions (DFIs), Investment Banks,

leasing companies, modarabas, and housing financing companies. Scheduled Banks and NBFIs (excluding

1 Dr. A.K.Niazi & Ch. Rashid Ahmed Javed; Outlook for the Pakistan Economy, September 2004

HIMS CITY 21


22/67

INDUSTRY ANALYSIS

modarabas and leasing companies) are both regulated by State Bank of Pakistans Prudential regulations,

albeit through different wings, and are subject to different SBP regulatory requirements such as capital

and liquidity reserve requirements.

Compared to commercial banks, which cater mostly to short-term working capital requirements, NBFIs

cater to the medium and long term financing needs and thus are barred from engaging in any commercial

activities including the trade business and issuing checks. However, the SBP has allowed commercial

banks to undertake long-term project lending. Among the scheduled banks, only Pakistani commercial

banks are listed. All banks/DFIs are facing stiff competition to attract new customers. With the

privatization program that began in Pakistan in 1991, two of the five NCBs and three DFIs were privatized,

and eleven new private banks were set up. Competition among banks is getting tougher and profit marginslower.

Along with the growth in size, the banks are now incorporating innovative approaches to their traditional

commercial banking operations, keeping in view the changing demand of time, and emphasizing more on

personalized service, electronic funds transfer, sophisticated financial products such as electronic banking,

auto-teller machines (ATMs) and evening banking.

The backbone of Pakistan's domestic financial system is still provided by the five major banks, which are

Habib Bank Ltd., National Bank of Pakistan, Muslim Commercial Bank, United Bank Ltd. and Allied Bank

Ltd. The three NCBs, Habib Bank, National Bank and United Bank, despite the severe financial crunch, are

still the market's dominant players. Bank-Al-Habib is still behind all these five banks in many aspects.

HIMS CITY 22


23/67

INDUSTRY ANALYSIS

EXHIBIT I: BANKING VITAL STATISTICS

2000-01 2001-02 2002-03 2003-o4

Number of scheduled banks 45 47 46 46

Foreign banks 20 22 21 21

Scheduled banks' branches 8400 8523 8597 8040

Foreign Banks' branches 74 83 85 81

Pakistani Banks' branches

abroad124 126 122 119

Deposits of scheduled banks

(Rs. in billion)670.7 696.7 743.6 839.9

Foreign Banks' share in

deposits (%) 18.9 18.9 22.3 21.6Advances of scheduled banks

(Rs. in billion)413.8 474.7 552.5 644.1

Foreign banks share in

advances (%)14.7 16.5 18.1 17.7

HIMS CITY 23


24/67

INDUSTRY ANALYSIS

Total Assets/Liabilities of

Scheduled banks (Rs. in

billion)

1647.6 1498.6 1616.6 1587.6

Source: SBP

C ORRELATION BETWEEN THE BANKING INDUSTRY AND THE ECONOMIC/REGULATORY ENVIRONMENT:

Banking is a key economic sector, which keeps the wheel of the economy moving and an efficient banking

system is vital for smooth and rapid economic development. The government maintains a dominant rolein the sector not only as a guardian of the system but also as the main source of the largest provider of the

financial services. The system is dominated by in-efficiently run government owned financial institutions,

which are subject to considerable political interference, and have as a result, developed a poor quality

portfolio of assets, substantial over-staffing and poor human capital. Competition from foreign banks and

the newly created banks provides limited competition and remains as niche players (especially in big cities

only). They are however more profitable than NCBs because of their better in house skills, more focused

activities and a much greater degree of freedom in conducting credit related operations.

Money and capital markets are small and trading is generally carried out in government securities and in

the equities of a relatively small number of companies. The government finds the commercial banks

captive for absorbing its securities; by its pre-employed powers to obtain funds at below market rates and

HIMS CITY 24


25/67

INDUSTRY ANALYSIS

through its policies on subsidized and directed credit it has heavily burdened the financial sector.

Cumbersome legal processes and the indifferent application of accounting, auditing and supervision

standards have contributed significantly to the poor performance of financial institutions.

On April 3,1999 the governor of SBP, warning the bankers expressed his anxiety over the state of affairs of

the banking sector and recommended joint ventures and mergers and launching of viable and innovative

banking products 2 . According to him, the days of heavy reliance on foreign currency deposits as a cheap

source of funds and investment in government paper with lucrative rate of return were over. The

limitations of government borrowing by IMF posed as a challenge for banks to find new avenues for

lending. The weakness lied in the supervisory capacity of the SBP because the officials were over burdenedby the routine work (and there was no incentive for work structure).

There is an uncertainty in the environment because of which, there is not just the capital allocation (supply

side) that is the sole issue, but the issue of risk allocation (demand side) is also paramount. Financial

markets and intermediaries change over space and time according to the size of the country, complexity

of transactions, available technology as well as differences in political, cultural and historical backgrounds.

The nationalization of the early 1970s had serious impact on the banking system as it was used as a

vehicle to promote political interests in contravention to the principles of efficiency. The ills of banking

such as overstaffing, recruitment on recommendation instead of on merit, loans to political favorites, bad

2 Economic Review 2004

HIMS CITY 25


26/67

INDUSTRY ANALYSIS

debt, and corruption all emanated from Nationalization. In the early 1990s, the two nationalized banks

were partially privatized and the banks in the private sector were allowed to operate, which led to

mushrooming of banks in the country.

According to Supreme Courts judgment on 26 th December99, charging interest (Riba) was un-Islamic and

had to be replaced by profit & loss system. This new system did not prohibit charging a fixed mark-up on

loans, however it prohibited financial institutions from charging interest on accrued interest. A serious

drawback in banking sector often alluded by the governor of SBP was the huge spread between lending

and borrowing rates running as high as 8 9 % as the lending rates sector to 20 % or more. Banks were

also pressing hard for lowering the profit allowed on NSS in order to compete with big deposits frompension funds and provident fund schemes.

The SBP governor has admonished the banks to go for project lending but with prudence and after

ascertaining fully the viability of the projects . The previously booming industries of the country i.e.

textiles, cement and sugar would not get funds as they were no more viable projects. The banks will stress

for new sectors and especially small projects.

Banking sector is now facing tough time in the wake of lower interest rate, keen competition for deposit

mobilization and restricted avenues for lending, The huge bad debt and sagging stock market have

also impeded the privatization of public sector banks and financial institutions.

HIMS CITY 26


27/67

INDUSTRY ANALYSIS

E CONOMIC CHARACTERISTICS

MARKET SIZE:

The market share of Finance and Insurance sector is 2.5% of GDP in the fiscal year 2000 (FY00).

MARKET GROWTH RATE:

The growth in finance and insurance declined to 6.9% in FY00 from 15.0 percent last year, which is largely

attributed to the credit squeeze associated with the slowdown in financial intermediation and investment

activity in the banking sector.

SCOPE OF COMPETITIVE RIVALRY:

The competitive rivalry among the banks is very strong.

STAGE IN LIFE CYCLE:

The banking industry is in the growth stage of the life cycle.

NUMBER OF COMPANIES IN INDUSTRY:

HIMS CITY 27


28/67

INDUSTRY ANALYSIS

The local financial sector comprises of banking institutions and non-banking financial institutions (NBFIs).

There are 46 commercial banks operating in Pakistan comprising 25 local and 21 foreign banks.

TECHNOLOGY/ INNOVATION:

Technology plays an important role in this industry. It is vital and imperative to be successful. Technology

encompasses systems and controls like ATMs, Cash Management, accounting etc.

INDUSTRY PROFITABILITY:

All the foreign banks in the year 1998 were indulged in arbitrage that is, they took advantage of the

market variance. After 1998, the multinational banks were in losses, as they had to mobilize their deposits. To be competitive and meaningful the banks have to increase their spectrum of services.

EASE OF ENTRY:

The scheduled bank should have a paid up capital and reserves in excess of PKR 500mm. All foreign

Banks in Pakistan are required to maintain paid up capital of approximately USD 10 million or seven and a

half percent of their demand and time liabilities, whichever is higher. Moreover the state Bank of Pakistan

has suggested increasing the minimum capital requirement for banks from PKR 500 million to PKR 1 billion.

T HE KEY SUCCESS FACTORS OF THE INDUSTRY

TECHNOLOGY RELATED KSF

HIMS CITY 28


29/67

INDUSTRY ANALYSIS

This is one of the key issues with the banking industry, technological advancement, not only makes the

operations of the banks more efficient, but also enhances the efficiencies of the bank clients.

DISTRIBUTION RELATED KSF

The distribution network is important for a retail bank; on the other hand, wholesale banks have less of a

requirement for a large distribution system.

MARKETING RELATED KSF

In the case of investment banking services, technical expertise and track record become increasingly

important. The foremost competitive edge however will be the origination and relationship managementteam of a bank, i.e. the corporate banking personnel.

SKILLS RELATED KSF

As given in the previous point, these tend to be increasingly important for Investment banking and capital

market work, in the case of commercial banking; trade finance is an area where the skill set is likely to be

high.

HIMS CITY 29


30/67

THE HABIB GROUP

H ISTORY OF HABIB GROUP

PROFILE

DAWOOD HABIB GROUP, who are the sponsor directors of Bank AL Habib Limited, has a very long track

record of banking which dates back to 1920s. They were among the founder members of Habib Bank

Limited, which was established in 1941 in Bombay as a public limited company and after partition, the

head office of HBL was shifted to Karachi. Since then, Habib Bank has played a vital role in meeting the

financial and banking needs of Pakistan. The first offer of securities made by the Government of Pakistanwas fully subscribed by Habib Bank. Within a short span of time, a vast network of branches was

established to facilitate trade, commerce and industrialization in the country. The Bank continued to

record tremendous growth and progress and emerged as the leading commercial Bank in Pakistan when it

was nationalized along with all other Banks in Pakistan on December 31, 1973.

After nearly 18 years of nationalized of banks in Pakistan, the Government of Pakistan again decided in1991 to allow private sector to establish commercial banks in the country. It was under its privatization

policy that DAWOOD HABIB GROUP were the first to be granted permission by the Government of Pakistan

to set up a commercial bank. It was in October 1991, that Bank Al Habib was incorporated as a Public

HIMS CITY 30


31/67

THE HABIB GROUP

Limited Company and was quoted on the Stock Exchange and started full-fledged operations as a

scheduled bank in January 1992 and then also became a member of the Clearing House.

Mr. Hamid D. Habib, grandson of the founder of Habib Group, is the Chairman of Bank Al Habib Limited

since inception. He was also Director in Habib Bank Limited way back in 1954 and was subsequently

appointed as Chairman of Bank Al Habib Limited in 1971. Mr. Hamid D. Habib has also held senior positions

in the Government of Pakistan, including Chairman, Export Promotion Bureau, Special Adviser to the

President of Pakistan on Finance, Economics, and External Trade Affairs, with the rank of a Federal

Minister. (Late) Rashid D. Habib, who was the Managing Director of Habib Bank in 1953 till the

nationalization of the Bank on December 31 1973, was appointed as the Managing Director & Chief

Executive of Bank Al Habib Limited which post he held till he expired in 1994. After his death Mr. Abbas D.

Habib who was the Joint Managing Director, was appointed as the Managing Director & Chief Executive of

the Bank.

During the tenure of Mr. Rashid D. Habib, Habib bank introduced many innovative schemes like evening

banking, school banking, children's savings scheme, computerized banking, credit cards and travelers

cheques.

HABIB BANK LIMITED

HIMS CITY 31


32/67

THE HABIB GROUP

Habib Bank Ltd. was founded as a Public Limited Company in 1941in Bombay with a Paid up Capital of

Rs.2.5 million and before the creation of Pakistan the Muslims owned organization of the sub-continent

shifted his head office to Karachi. On independence of Pakistan in 1947, the bank provided valuable

services to the newly founded state from inception. Habib Bank established a work of branches in East and

West Pakistan in order to facilitate the expansion of Trade & Commerce in the country.

Mr. Rashid D Habib the former president of the bank introduced many new banking schemes such as

evening banking, school banking, children saving schemes, computerized banking, credit cards and

travelers cheque.

HIMS CITY 32


33/67

THE HABIB GROUP

HIMS CITY

YEAR EVENT1841 Habib Esmail, founder of the Habib Group, was originally associated with Khoja Mithabhai

Nathoo, a leading dealer in metals established in Bombay, India, in 1841.1920 Habib & Sons was formed in 1920 to trade in copper, oil seeds, bullion and other

commodities, and to act as a merchant bank.1941 Habib Bank Limited was established in 1941 in Bombay as a public limited Company1974 Nationalization of Habib Bank Ltd took place under government's nationalization policy.1984 Habibsons Trust and Finance Limited started working in London.1988 Habibsons Trust and Finance Limited was renamed as Habibsons Bank Limited1990 Habibsons Bank Limited started operations in Zurich, Switzerland.

Overseas Bank of Africa started operations in Johannesburg, South Africa.1991 On 6th May 1991, Overseas Bank of Africa became a full member of the Clearing House and

started issuing its own cheque books1991 Under the privatization policy of the Government, Habibs were regranted permission to

establish a bank.1992 Bank Al Habib (Formerly Bank Commerce Al-Habib Ltd.) commenced full-fledged

commercial banking.

1992 On 4 May 1992 Overseas Bank of Africa formally changed its name to Habib Overseas

Bank Limited.1994 Mr. Rashid D. Habib expired2000 Mr. Hamid D. Habib (Chairman) Bank Al Habib expired.

2000 Mr. Ali Raza D. Habib assumes as new Chairman of Bank AL Habib Limited

T IMELINE

33


34/67

BANK-AL-HABIB

A N OVERVIEW OF BANK-AL-HABIB

BANK-AL-HABIBS BUSINESS PHILOSOPHY:

Our banking philosophy is firmly based on two essential principles: Efficiency and Security.

We believe that our primary responsibility is to serve our depositors and we are conscious of

the trust reposed in us. It is our duty to protect and honor it at all times.

In practice, this means meticulous adherence to prudent lending policies, adequate liquidity at all times

and placement of surplus funds with institutions of sound standing

In August 1991, the government of Pakistan permitted the establishment of banks in private sector and

Habib group was allowed to open a bank. In January 1992, the Habib group established on full-fledged

commercial bank with the name of Bank Commerce Al-Habib Ltd. The name was later changed to Bank AL-

Habib. The bank established five branches within a short span of time in one month at important trade

centers in Multan, Karachi, Peshawar, Quetta & Mirpur-Azad Kashmir. Later branches at Lahore,

Faisalabad, Islamabad, Sialkot and Nawabshah were also established. Presently the bank operates all overthe country. Keeping the traditions of Habib Groups as motto Bank-Al-Habib provides banking services to

its valued clients with personal attention and complete secrecy and protection. The bank has an

authorized capital of Rs.300 million and management and control is vested with highly professional,

trusted and devoted officers and personnel.

HIMS CITY 34


35/67

BANK-AL-HABIB

HIMS CITY

O f f . G r a d e

O f f . G r a d e

A s s t . M g r

M a n a g e r

S r . M g r

C h i e f M g r

S r . C h i e f M

A s s t . G M

G M O p e r a t i o n s

O f f . G r a d e

O f f . G r a d e

A s s t . M g r

M a n a g e r

S r . M g r

C h i e f M g r

S r . C h i e f M

A s s t . G M

G M F i n a n c e

O f f . G r a d e

O f f . G r a d e

A s s t . M g

M a n a g e r

S r . M g r

C h i e f M g

S r . C h i e f M

A s s t . G M

G M I T

O f f . G r a d e

O f f . G r a d e

A s s t . M g r

M a n a g e r

S r . M g r

C h i e f M g

S r . C h i e f M

A s s t . G M

G M C r e d i t & M a r k

D i r e c t o r

E x e c u t i v e D i r e c t

M a n a g i n g D i r e c t

C H A I R M A N

AGM Persona l &Admin

BANKAL HABIB

35


36/67

BANK-AL-HABIB

OBJECTIVES

The aim of Habib Group is efficiency and Projection of its valued clients who has trusted us with their hard-

earned money. They highly appreciate the trust of their clients in and perform functions as their moral

duty to protect their investments with reliability. As Prudent Bank they consider such factors when lending

money to the prospect borrowers.

THE MANAGEMENT OF BANK AL -HABIB

The grand son of the founder of Habib Group Mr. Hameed D Habib is the chairman of Bank Al Habib. He

has vast experience of business of Habib & Sons from 1947 to 1954. He also served as director of Habib

Bank and later in 1971 as its chairman and helped in the progress of the bank. He also served governmentof Pakistan on a senior position and appointed chairman of Export Promotion Bureau in 1977. He was also

appointed as economic advisor to the president of Pakistan on Foreign, this appointment was equivalent to

Federal Minister Trade & Economic.

MR. RASHEED D HABIB

Mr. Rasheed D Habib started his business career from Habib Group in 1947. He had a vast experience of

banking including foreign exchange local currency financing, credit evaluation, Import & Export. He wasappointed as Managing Director of Habib Bank in 1941 where he worked up the nationalization for Bank-Al-

Habib. After his death, the new chairman was Hamid D Habib, who also expired in the year 2000 and the

current chairman is Mr. Ali Raza D. Habib

HIMS CITY 36


37/67

BANK-AL-HABIB

MR. ABBAS D. HABIB

Mr. Abbas D. Habib has over 30 years of experience in banking on commerce and Trade. He is the CEO &

Managing Director of Bank Al-Habib. He is also a Director of Habib Sons Bank Ltd.

S ERVICES OF BANK AL-HABIB

HIMS CITY 37


38/67

BANK-AL-HABIB

CONSUMER BANKING:

There is variety of services offered by Bank Al-Habib for the consumer-banking sector.

Current and saving deposit accounts for individual clients.

Safe deposit lockers available for the consumer.

Availability of transfer funds.

Provision of short and medium term loans for consumers.

Foreign currency accounts available for the consumer sector.

Over draft facilities.

Treasure call accounts are also opened for the individual clients.

Facility of monthly profit plan where profit will be credited monthly to the account.

CORPORATE BANKING:

Provision of working capital and trade finances facilities to medium and large business houses.

Facility of letter of credit for imports and export purposes.

Availability of various types of local and foreign currency deposit accounts. Short-term finance for foreign trade through negotiations of bills of exchange.

Purchase and sale of DBC (dollar bearer certificate), FEBC (foreign exchange bearer certificate),

FCBC (foreign currency bearer certificate).

Treasure call accounts are also available for corporate clients.

HIMS CITY 38


39/67

BANK-AL-HABIB

The bank also maintains correspondent relations with leading international banks.

These include American Express Bank, USA; Banco Di Roma, Italy; Commerzbank and Dresdner Bank,

Germany; Midland Bank, PLC U.K.; The Royal Bank of Canada, Canada; Hong Kong and Shanghai Banking

Corporation Ltd., Hong Kong.

In the short span of eight years, Bank AL Habib has made an indelible mark on the banking scene in

Pakistan. Following an enviable and honored tradition of banking stretching back more than a hundred

years, the bank is acknowledged for its prudent policies, enterprise tempered with caution, high

profitability and its total dedication to Customer interest. It is with pleasure that a portfolio of four highly profitable investment products are being presented here.

HIMS CITY 39


40/67

BANK-AL-HABIB

D EPARTMENTS OF BANK AL-HABIB

Given below are the various departments of Bank AL-Habib.

MARKETING AND CREDIT DEPARTMENT:

Department deals in short, medium and long term loans.

Long-term loans are provided for more than three years.

Department is involved in functioning as retail and corporate banking by providing current, call,

saving and term deposit accounts in retail banking. Where by providing working capital finance, term

finance network and foreign currency deposit accounts in corporate banking.

FOREIGN TRADE DEPARTMENT:

Provision of customer service regarding import and export refinance.

Facilities of export finances.

TREASURY DEPARTMENT:

This department deals in foreign exchange and money market.

HIMS CITY 40


41/67

BANK-AL-HABIB

CREDIT AND ADMINISTRATION DEPARTMENT:

To control and monitor all the internal documents.

PERSONAL ADMINISTRATION:

This department mainly helps in developing strategies for the human resource, implementing those

strategies and evaluating the results.

Responsibility of looking after the supplies of stationery and other equipment.

OPERATIONAL DEPARTMENT:

Dealing with the individual and corporate clients for opening accounts. Dealing with the working of overall currency transactions.

Responsibility of overall dealing with clients for providing information about the bank.

AUDIT DEPARTMENT:

The function of this department is to closely monitor the performance of the bank.

Another function is to evaluate the environment of the bank with respect to the rules and regulationsof the bank.

HIMS CITY 41


42/67


43/67

BANK-AL-HABIB

P OLITICAL, ECONOMIC, TECHNOLOGICAL & CULTURAL FACTORS

POLITICAL AND LEGAL FACTORS:

Government Interest

Government is more interested in the retrieval of the poor managed banks than the formation of

new domestic banks.

Political Influence

The political influence is high therefore the risk of defaults is also high.

Political Instability

Due to the unstable government and the changes in policies the banking sector has suffered a lot.

Tax rates

Due to high tax rates charged to the domestic banks the profit margins are shrinking.

HIMS CITY 43


44/67

BANK-AL-HABIB

ECONOMIC FACTORS:

Business Cycle

Due to high inflation rate the economic growth is shrinking because the investors are highly

unsatisfied with the situation and therefore they are putting less efforts in increasing their investment

level.

Interest Rates

Due to high interest rates charged the industrial growth is low.

Economic Sanctions Due to the event of May 1998, the Countrys economy was subjected to several economic sanctions

putting enormous pressure on the balance of payments.

Forceful Measures

The Government opted for forceful corrective measures with regard to fore transactions in general

and fore payments in particular. This has resulted in the erosion of investors confidence.

Export Business

The significant achievement during the year is the 99% increase in the export business and 71%

increase in import business.

Exchange Rate

HIMS CITY 44


45/67

BANK-AL-HABIB

The dual exchange rate was replaced by a unified exchange rate system. The margin requirements

of up to 30% for opening an import letter of credit was progressively reduced.

Import Tariff Rates

Import tariff rate was reduced from 45% to 30 %, which allowed increased in imports mainly the

industrial raw material and machinery.

SOCIAL AND CULTURAL FACTORS:

Education Due to the formation of commercial banks and the increase in the education and knowledge of

general people the improvement in the banking sector is expected.

Religious factors

Due to the fact that the bank, which is UN Islamic, charges the interest rate the people dont invest

their money in Banks.

TECHNOLOGICAL FACTORS:

Computer Equipment

Latest version computers are the part of every commercial bank in Pakistan.

HIMS CITY 45


46/67

BANK-AL-HABIB

Electronic Banking

Facilities of electronic banking such as internet banking services where the customers can view their

account balances and obtain statements through internet is also a technological advancement.

Automated Teller Machines

The automated teller machine (ATMs) is the facility that is major value addition for the customers

as well as for banks.

HIMS CITY 46


47/67

BANK-AL-HABIB

S WOT ANALYSIS

STRENGTHS:

The bank works on modern lines to focus on market segmentation through geographic

segmentation, segmentation by class of businesses and segmentation on the basis of sector.

The bank aims at providing satisfaction and motivation to the employees.

The bank is termed as modern and progressive institution having extensive technological capabilities

for meeting the demand of the market.

The bank has the major strength of competent and hardworking management.

WEAKNESSES:

The bank has lower level of branch network as compared to nationalized banks.

The bank lacks the amount of financial resources as compared to foreign banks and nationalized

banks.

OPPORTUNITIES:

Further growth is expected in the banking sector if economic climate of the country improves.

The recent recovery in the textile sector and exports are expected to continue because of the better

performance in the agriculture sector, which can yield greater exportable surpluses.

HIMS CITY 47


48/67

BANK-AL-HABIB

The dual exchange rate is replaced by a unified exchange rate system and the margin requirements

of up to 30% for opening of import letter of credit are progressively reduced.

The import tariff rate has reduced from 45% to 30%, which has increased availability of industrial

raw material and machinery.

Through an increase in branch network the banks can expand their businesses.

THREATS:

The economic uncertainty and lower level of income can affect the investment level, which is

generally very low resulting in creating negative impact on the businesses of the banks.

The low yields on the treasury bills and commercial loans due to low lending rates are eroding the

profitability level of the bank.

Low credit demand in the market is leading to an intense competition among banks for the relatively

few good borrowers in the market, resulting in substantial reduction in lending rates. This is resulting

in decrease in the profit margins.

DFIs, modarbas, and leasing companies are a threat for the banking industry.

Conditions in money and foreign exchange markets are extremely unfavorable for the bankingindustry.

The nationalized banks and foreign banks are the threat for the domestic banks as both these kinds

of banks have major market share.

HIMS CITY 48


49/67

BANK-AL-HABIB

HIMS CITY 49


50/67

BANK-AL-HABIB

F IVE FORCE ANALYSIS THREAT OF NEW ENTRANTS

The threat of new entrant is high, as the switching cost for the consumer is low. Any consumer can

switch on to new bank if it is providing better services on lower rates.

Due to high product differentiation the threat of new entrant is low as every bank provides different

packages of services.

Capital requirements of establishing a bank is very high due to high fixed cost therefore the threat of

new entrant is low.

POWER OF BUYERS

As the concentration of buyers as compared to suppliers is low particularly because the buyers are

fragmented therefore the power of buyers is low.

The product differentiation for the commercial banks are high as they provide different packages

such as Tele banking, ATM Cards, different credit card schemes such as Citibank has started the petrol

package on the credit card which makes the power of buyers high.

POWER OF SUPPLIER The concentration of supplier is low, as the money suppliers are foreign donors, State Bank of

Pakistan, shareholders and depositors.

HIMS CITY 50


51/67

BANK-AL-HABIB

The differentiation of suppliers product is low therefore the power of supplier is low.

The availability of the substitute product is low therefore the power of supplier is high.

The switching cost for the domestic banks is high because of limited number of suppliers therefore

the power of supplier is high.

The switching cost for the normal consumer is low because of high number of banks therefore the

power of domestic banks are low.

FACTORS AFFECTING COMPETITIVE RIVALRY

The number of competitors is high so the competitive rivalry is also high. Nationalized banks and

foreign banks have major market share and a very low percentage remains with the domestic banks. Industry growth rate is comparatively low but it is assumed that the change in economic policies and

increase in export will lead to increase in growth rate.

Fixed cost for establishing a bank is very high therefore competitive rivalry is high.

Switching cost for the consumer is low which leads to high competitive rivalry.

Due to high fixed cost involved in the formation of bank the exit barriers are high which leads to high

competitive rivalry.

FACTORS AFFECTING THREAT OF SUBSTITUTES

The substitute of banking services is modaraba sector, leasing sector, DFIs sector and because the

switching cost is low therefore the threat of substitute is high

HIMS CITY 51


52/67

BANK-AL-HABIB

P ORTERS MODEL

HIMS CITY

INDUSTRY COMPETITION

Foreign BanksCitibank, ABN- Amro, ANZ, StandardChartered Bank, Deutsche, Bank of America,Societe General, Indo Suez Agricole,Hongkong Shanghai Banking CorporationLtd., Habib AG Zurich, Emirates, Mashriq,Gulf, Al Falah, Amex, Bank of Tokyo, DohaBank, Rupali Bank, International FinanceInvestment and commerce bank Ltd.

Local Private BanksAl Habib, Askari, Union, Soneri, Metro,Prime, Prudential, Bank Alfalah, Bolan Bank,Faysal bank, Platinum, Prime Commercial

Local public BanksHabib bank ltd., National Bank, United Bank,First womens Bank, Allied Bank, MuslimCommercial Bank and others

SUPPLIERS

State Bank of Pakistan

Individual customersCorporate customersOther BanksComputer Industry

News AgenciesSecurity CompaniesUtilities (PTCL & KESC)Educational

BUYERS

Individual customersCorporate customersOther banks (in case of correspondent

banking)

POTENTIAL ENTRANT THREATS

New local and foreign banks

SUBSTITUTESForeign Investment, DFI products, Prize bonds, Stock Exchange, Hundi, Homecommittees (BC system), Gold Insurance, national savings scheme, Real estate,Leasing/ Hire-Purchase / Modaraba 52


53/67

BANK-AL-HABIB

S ERVICES OFFERED BY OTHER BANKS

BOLAN BANK LIMITED

Bolan Bank one of the national bank today operates with around 50 branches in the country. Like every

other local bank certain banking services are offered to both Corporate and Individual accounts.

PRUDENTIAL INVESTMENT BANK

Prudential Investment Bank founded in 1994. Operates in the major cities of the country. Their operations

today are spread over from Karachi to Peshawar, including Mardan as well.

Prudential Investment Bank today offers the following services, which includes:

Growth certificate of investments

Khas Certificates of investment

Standard Certificates of Investment

INDUS BANK LTD.

HIMS CITY 53

BANK AL HABIB


54/67

BANK-AL-HABIB

Indus bank operates with nine branches in Pakistan. It was incorporated on November 04, 1991 as a public

Ltd. Co. under the companies ordinance, 1984 and received license from the State Bank of Pakistan to

under take and carry out the banking operations in Pakistan on January 13, 1992.

Following are the services that are provided by the bank:

Special Notice Deposits

Saving Bank Deposits

Super Saver Account

Term deposit scheme

PRIME BANK LIMITED

Prime Bank today operates in ten major cities of the country. It has been in business for the past five

years now. Their services include:

Consumer Banking

Corporate Banking Commercial Banking

HIMS CITY 54

BANK AL HABIB


55/67

BANK-AL-HABIB

F INANCIAL ANALYSIS OF OTHER BANKS

RatiosBank-Al-

Habib

Bolan

Bank

Prudential

Bank

Indus

Bank

Prime

bank

Current Ratio 1.03:1 .75:1 .98:1 .78:1 .72:1

Net Working Capital 489291 269512 164902 364702 2475811

Asset Turnover .41 times .0972 times .012 times .036 times .0172 times

Equity Turnover 2.32 times .1847 times .17 times .02 times .1647 times

Operating Profit Margin 18.85% 49% 40% 36% 54%

Net Profit Margin 8.61% 21.33% 37% 25% 25%

Return on Asset 1.20% 0.50% 2.10% 0.90% 0.40%

Return on Equity 19.98 0.52 0.52 0.06 0.047

HIMS CITY 55

BANK AL HABIB


56/67

BANK-AL-HABIB

INTERPRETATION (Refer to Annex: 01,02,03)

HIMS CITY

2001 2002 2003 2004

Leverage RatioDebt to Asset Ratio 74% 87% 89.68% 87%

Activity Ratio

Total Asset Turnover 0.11 Times 0.14 Times 0.12 Times 0.12 Times

Equity Turnover 1.62 Times 2.32 Times 2.32 Times 1.9 Times

Profitability RatioOperating Profit

Margin 17% 19% 21.80% 24.40%

Net Profit Margin 7.15% 9.0% 9.79% 10.97%

Return on Share

Holders Equity13% 20% 23.34% 21.29%

Return on Total Assets 0.76% 1.20% 1.20% 1.36%

Liquidity Ratio

Current Ratio 1.02:1 1.03:1 1.01:1 1.1:1

Activity Ratio Total Asset Turnover 0.11 Times 0.14 Times 0.12 Times 0.12 Times

Equity Turnover 1.62 Times 2.32 Times 2.32 Times 1.9 Times

F INANCIAL ANALYSIS OF THE BANK

56

BANK AL HABIB


57/67

BANK-AL-HABIB

The level of debt financing is constant decreasing, which means the bank has not been successful to

maintain its ability to finance debts.

There is no improvement in the efficiency of the assets in generating sales.

The equity turn over ratio has also decreased.

There is a decline in operating profit margin because of increase in operating expenses.

Decline in profit margin because of doubtful debts and increase in dimmuneration in the value of

investment.

The decrease in return on shareholders equity is because of lower profits.

The return on total assets has also decreased.

There is no significant change in the current ratio and as it is close to 1, which means that, the amount

of current assets and current liabilities is equal.

HIMS CITY 57

BANK AL HABIB


58/67

BANK-AL-HABIB

C OMPETITIVE ANALYSIS

HIMS CITY 58

BANK-AL-HABIB


59/67

BANK-AL-HABIB

On carrying the study and ratio analysis certain areas on the comparison became wide open. Although

as mentioned earlier that we are operating in a debt struck economy where the investment graph is

falling day by day.

RETURN ON ASSETS :

On comparison with the other bank, Prudential Investment Bank projects to be in a better shape with a

ROA of 2.1 % as the others fall much below. This shows that the earnings productivity of Prudential is

the highest amongst them.

RETURN ON EQUITY:

In this case bank Al-Habib seems to have a ROE of 19.98%. As to the analysis that the current ratio is

close to one, which is an indication that it has an almost equal percentage of the current assets to

current liabilities.

CURRENT RATIO:

This is the indication of the margin of safety and the ability to meet its obligations. Keeping this in viewBank Al-Habib has the highest (1.03), which places it in the safest category as far as the industry trend

is concerned.

NET PROFIT MARGIN:

HIMS CITY 59

BANK-AL-HABIB


60/67

BANK AL HABIB

Here again Bank Al-Habib takes the lead as if we see the current position of the industry than its much

better at 8.6% compared to 3.7, 2.1, 2.5 & 2.4 % respectively. This shows that Bank Al-Habib enjoys

good reputation amongst the present on the list.

EQUITY TURNOVER RATIO:

Looking at the industry average it was expected that Bank Al-Habib would turn out to be the leader in

effective equity financing.

ASSET TURNOVER RATIO:

Asset utilization and its effectiveness goes to Bank Al-Habib as the industry average is low thusinterpreting that asset management has been ineffective with the other banks.

NET WORKING CAPITAL:

Prime bank has showed significant amount of net working capital available to reinvest in other business

ventures of for the growth of the bank. Its net working capital is an example of the utilization and

productivity of sales.

OPERATING PROFIT MARGIN:

Prime Bank shows positive lead as their operating profit margin is 55 % of the industry.

HIMS CITY 60

BANK-AL-HABIB


61/67

BANK AL HABIB

K EY STRATEGIST

Mr. Ali Raza D.Habib is the current chairman of Bank-Al-Habib. He took the position in the year 2000 after

the death of the former Chairman Mr. Hamid D.Habib.

Mr. Abbas D. Habib is the CEO & Managing Director of Bank Al-Habib and also the Director of Habib Sons

Bank Ltd. He has an experience of over 30 years in banking on commerce. Mr. Abbas plays the role of the

key strategist at Bank-Al-Habib.

MR. Abbas is responsible for the profitability and the strategic decisions made at the bank. He is

committed towards the task for achieving the two essential principles: Efficiency and Security, which is the

core of their business philosophy. Having such a huge experience in the related field, Mr. Abbas is stillunable to develop a strategic vision and a mission statement for the bank, so that the bank can achieve

the specific objectives. Based on these evaluations Mr. Abbas deserves a B+ for his performance.

HIMS CITY 61


62/67

BANK-AL-HABIB


63/67

M INOR PROBLEMS

The bank is equipped with the latest technology, but lacks professionals to handle the latest

technology. Hence the company should train its employees to be efficient and to utilize the companys

resources effectively.

The process for giving loans and verifying the documents is a time consuming procedure, due to which

many profitable customers avoided applying for a loan at Bank-Al-Habib and moved towards other

competitor banks.

The decision making in the organization is centralized, hence it takes too much time decision-making.

Due to small network of branches in the country, Bank-Al-Habib has failed to achieve a major market

share in the industry.

Due to lack of financial resources the bank is not able to avail the arising opportunities in the industry.

HIMS CITY 63


64/67


65/67

CONCLUSION


66/67

C ONCLUSION

In the first half of 1999, Pakistans economy continued to suffer from the after affects of the economic

sanctions of 1998 and the impact of the global recession. The economic performance of the Country

showed signs of improvement in the second half of the year mainly due to the boom in textile industry.

The overall growth of the economy was helped by a gradual phasing out of some restrictive measures

imposed by the Government to deal with the impact of economic sanctions. Due to decrease in import

tariff, which has resulted in increased imports.

Even though some of the macro economic indicators improved during 2000, however the environment of

banking sector remained difficult due to overall low demand of credit. This has resulted in no new

investments in any sector.

The overall low demand of credit has created intense competition among banks, which resulted in

decrease in lending rates leading to lower profit margins. However, it is expected that with new economicpolicies the economy will revive.

HIMS CITY 66

CONCLUSION


67/67

Bank Al-Habib and other banks should make strategies by developing new products. Plans should be made

to further expand the credit portfolio and an increase in the branch network should be made for

geographical expansion.

Documents

BankAlHabib for Micro Economic With Alteration Offacts and f