Our policy makers have come a long way in restructuring its financial sector. The reforms cover both- money markets as well as capital markets. The impetus to change came from the World Bank which almost always targets the financial sector of a country as a first step.
The programmes's ownership lay outside the country with almost no support from the parliament as well as with the popular economic writers.
Thus we saw a lot of obstacles in the programmes's implementation. As a result the pace of reforms suffered, and instead of a smooth transition we saw several false start signals.
This led to many investors as well as financial advisors getting disgruntled and leaving Pakistan. Important lessons can be learnt from the restructuring exercise in the financial sector, and perhaps it would be wise not to repeat the same mistakes when it comes to restructuring the telecom and the energy sectors.
Beginning 1991, with guidance from the International Monetary Fund (IMF) and the World Bank, the Nawaz government privatized the Allied Bank Limited (ABL) and the Muslim Commercial Bank (MCB).
The ABL was sold to its employees, while the MCB was sold to a group of leading domestic industrialists. Under another initiative the Asian Development Bank (ADB) sponsored the financial markets deepening and strengthening programme.
By the end of 2003 the United Bank Limited (UBL) and the Habib Bank Limited (HBL) had been privatized. The ABL is once again in the market for management control under a restructuring scheme of the regulator, the State Bank of Pakistan (SBP).
The regulators are rightfully content for having transferred about 80 per cent of the banking sector assets under the private sector management. The reforms have been largely successful, and have paved the way for secondary and tertiary wave of adjustments in the financial sector. But they don't seem to be coming as fast as they should have.
The MCB was the first bank governed by private sector's leading industrialists. What did they do with it? Absolutely nothing, except hiring a few strong relationship managers who could primarily disburse large amounts of credit in relatively short period of time.
Perhaps that was the decisive competitive advantage in 1991 when the other large banks were still in slumber. The MCB also invested in technology and is reaping some of the benefits. It increased market share in deposits, advances and trade finance till about 1998 and they all thought they were God's gift to mankind. Where is the MCB in 2004?
What the MCB was doing in the early 1990s to the nationalized commercial banks, the smaller private banks are doing to it now; simply snatching away the profitable businesses one by one, and picking up any employee with initiative.
So it has become a training ground for the smaller more efficient banks. What the owners have not realized is that banking is a service sector industry, and they can't treat their people like industrial workers putting ten hours on an automated machine.
The ABL was handed over to the employees who instead of adding value to shareholders concentrated on specializing in corporate politics and increasing the operating costs of the bank.
The compelling argument for employee-cum-owners was, "Why pay dividends when you can get the benefits through a structured salary package". On the policy level, the government sat on the 49 per cent shares as it had privatized the bank, was focusing on the other entities to be privatized.
In 2004, the results for the ABL are much worse than the MCB's. It needs serious induction of capital and professionals, and overall system's overhauling.
The justification for criticizing the two banks privatized in 1991 is noble enough to indulge in this otherwise despicable exercise. I know many good professionals working under restrained conditions, and not being enabled to implement their vision.
The responsibility therefore goes straight to the top, to the board of directors of these banks. What I want to bring out in this article are the similar threats looming on the UBL, the HBL and the ABL.
So the first question is, what is the problem with the UBL and the HBL today? Where did it come from? The problem lies in the restructuring of these two banks prior to privatization.
The government did not know the ABC of banking, so it had no choice but to hire the persons who they thought knew banking. With a large nationalized banking sector it did not have an option but to look towards the multinationals. The presidents were picked up from amongst known bankers.
These incumbents had to rely on their trusted teams, so in turn they picked up whosoever they could from their own parent organization or from within the narrow band of professionals working for multinationals.
This set of professionals was by no means trained to lead banks of these sizes. All they knew was to operate in a four branch network serving a select client base, and therefore excelled in doing what they knew best.
Their restructuring was a mirror image of that done in MCB in the early 1990s and included setting up of a small corporate and investment banking division.
Their strength lies in disbursing large amounts of credit to known customers in a relatively short period of time. So when we had too many hungry bankers looking to disburse loans in the backdrop of excess liquidity and falling interest rates, the results were as expected.
The banks' profitability suffered from following the price war model. A glimpse into their asset portfolio would reveal that the rates are not adjusted for the risk assumed.
What the privatized banks have not been able to do, and what will eventually lead them to grave damage, is to ensure a level of overall service standards measured through a series of customers experiences. They do have the appetite for large risk, but then that is all they seem to have, eventually at the shareholders cost.
You walk in almost anywhere in the world and you will know what to expect at these franchises. If Pakistani banks cannot ensure this they have lost half the battle. What is required is very clear focus on servicing clients' needs. There should be distinct branches for corporate banking, commercial banking, specialist trade finance banking, and retail banking.
Another area needing immediate improvement is the basic research and development within the local market, which is for all practical purposes absent. One can walk in to any of the president's office and ask for a report, which not only covers, lets say, the basics such as (i) cotton crop (ii) ginning and (iii) spinning, but also covers their linkages with inputs such as water availability, fertilizers prices, the global cotton crop/international prices, as well as the developments and opportunities in commodity trading (yarn).
You will not find it. Or let us take the sugar industry The available reports will cover primarily sugar manufacturing etc., but will not cover its linkages with the economics of sugar cane farming and/or the sale distribution mechanism of sugar in the country.
How do they propose to practice 'risk management' when the basic linkages have not been translated into a workable model? What is the effect on sugar cane and cotton crop if the price of natural gas (raw material for urea) is pegged to an international benchmark? They are not equipped to give you a logical numeric answer.
What are the reasons for such dismal organizational set-up at our banks? If these institutions do not understand the comprehensive production cycle of a product lets say sugar, from farming to production to end distribution to the ultimate customer how can they come up with new and innovative financing structures to add value in the trade.
Similarly changes have been taking place in the regulatory regime. These banks did not anticipate these and have waited too long to introduce Asset Management and Insurance products and services.
The final frontier is in global management of large banks with global networks. This reminds me of the story of two athletes from Lahore who decided to race on a distant day in future. One of them practised in Lahore for the whole of next year.
The other one spent summers in Nathia Gali to develop a set of supporting muscles, while increasing his blood haemoglobin, and thus his blood's oxygen carrying capacity. Then he also went to Karachi to run on the soft sand beaches, to work on yet another set of muscles.
When the two athletes ran on the day of the race, the one with better cross training on different turfs won hands down.
The saga of our banks is that of the Lahori athlete who stayed in town. His coach, manager and friends praised each other endlessly and all eventually turned in to frogs in a well.
We have not utilized the international network of HBL and UBL to gain the much needed knowledge so readily available in the developed banking sectors of the host countries. Citibank introduced consumer financing through credit cards, car leasing and home mortgage in Pakistan.
It also brought in the idea of 'asset securitization'. Orix Leasing introduced equipment financing to small businesses at the grass root level in our cities. The ABN Amro launched the direct debit card technology.
The Standard Chartered is brokering interest rate swaps, Orix Leasing has come up with Agri lease. What on earth have our banks been up to?. Concentrating on speedy remittances for our workers abroad. That's all. Why are we in this situation?
For the simple reason that the managers in New York, London and Singapore have not been "appraised" for sending home new products because fallacy lies in the top management's vision.
We are in no position to be "conquerors" in those territories, but as "pilgrims" we can learn a few tricks. And then perhaps lobby with the regulators to start building a viable operating environment for launching these products. But no, that is the multi donors' or the government's job.
The conclusion reached in this article is that the ultimate responsibility for the results lies with the Board of Directors and the upper echelons of management. The directors know very little about banking as a business, and the management comprises of what may be termed as "cogs in a system".
They are by no means the designers or orchestra conductors of the great multinational organizations they worked for. Therein lies the core issue behind the rudderless behaviour of the privatized banks.
Their claim to fame simply rests on having been part of the great multinational empires. Therefore their underlying charter reduces to simply rule the "other" category of employees, mostly coming from the second tier of the salaried social class of Pakistan.
However soon enough the economic forces of competition will render most of them useless, as the respective board of directors will continue with their classic mistake of hiring younger blood from the multinational arena in the hope to gain some competitive advantage.
A point in case is the induction of a rarely young executive at the UBL, and, of late, at the MCB. What the Board of Directors have consistently failed to acknowledge is their lack of knowledge and understanding of this particular business, and their growing uneasiness with loosing a grip over the market situation.
The piece of advice that goes out at the end of this article is that just like in life, there are no short cuts in business. As long as we do not address the fundamental restructuring issues pointed herein above, we will be running from pillar to post for competitive advantage.
