October 30, 2006	Monday	Shawwal 6, 1427

A new wave of mergers and acquisitions seems to be overwhelming the banking sector. After the Standard Chartered Bank has purchased Union Bank recently, news reports indicate that some more foreign banks, American and European in particular, are taking keen interest in increasing their stakes in the booming financial industry.

Making the biggest ever acquisition by any foreign bank in Pakistan, valued at $413 million, Standard Chartered has acquired 80.86 shares in Union Bank. Official circles are quite happy, understandably, that their efforts for consolidation in the financial sector are bearing fruits.

The European banks have a lot of excess liquidity, and on the other, Pakistani banks have performed exceptionally well, for variety of reasons, in the recent years. Frequent inquiries about the performance of financial institutions and regulatory laws are reportedly being received from abroad.

Over half a dozen foreign banks are mulling their moves, as markets elsewhere are considered essentially saturated and Asian countries, those growing economies like Pakistan in particular, present a large market for expansion and growth. This takes us to a position where more mergers and acquisitions are very likely in the near future.

Official circles claim that ‘banking reforms have strengthened the banking laws and prudential regulations have consolidated the working environment for the industry.’ Some of the financial sector analysts also hope that with the entry of western players, the industry standards and performance will improve further.

A few of the bankers are pinning hopes that with the introduction of western expertise, coming from highly competitive environment, “new products with new innovative ideas would change the shape of banking in the country”. It is also being anticipated that the local banks would revolutionise themselves to bring their banking at par with the international standards and practices.

Nonetheless, there are underlying fears as well, among those concerned, including the bankers and analysts that all may not be well with the robust financial sector.

There are uncertainties about the future of smaller Banks. Smaller banks in particular are feeling compelled to go for mergers. The compulsory requirement to have minimum paid-up capital of Rs6 billion ($100 million) by 2009 as required the State Bank of Pakistan is inducing sell-off and mergers.

Since 1998, smaller banks are disappearing from the market. In 1997, the total number of banks operating was 49. It has been reduced to 39 as on Dec 31, 2005.

Although, still on the lower side, the share of foreign banks in domestic market will go up with the trend of mergers and acquisitions. Presently, 11 foreign banks have nine per cent share in the financial market. With the acquisition of Union Bank, this share will go up to around 12 per cent.

Western banks are increasing their presence around the world by acquisition/investments and mergers.. In Latin America, for instance, the share of foreign bank was six per cent in overall credit of the sector. It went up to 42 per cent by 2004.

The banking sector is already too concentrated and top six banks have control of 63 per cent of the total market and their share in total profits is even higher at six per cent.

Too much concentration can impact the competitive environment which the country can ill-afford at this critical point of time. While credit by banks has played a vital role in high growth in last two years, there seems to be some collusion among bankers on fixing of deposits and lending rates.

It is one thing to be happy about policies are bringing good results, but it is also important to ensure that this new trend does not create problems for the bank customers or the economy as a whole.