July 04, 2007	Wednesday	Jamadi-us-Sani 18, 1428

KARACHI, July 3: Foreign banks were ahead of local banks in enjoying benefits of wider banking spread that was eight per cent in May. This explains the increased interest by foreign banks in the country.

Though the share of foreign banks in the banking sector was still not more than 12 to 13 per cent, their role became vital after mergers and acquisitions of local banks.

The foreign banks, which increased their share by acquisition of Pakistani banks, charged more from lenders, but passed on less profit to depositors. However, the spread of foreign banks which was 9.99 per cent in November 2006, has started coming down.Official data shows that in May 2007, the lending rate of foreign banks was 13.8 per cent while deposit rate was 5.45 per cent per annum. The banking spread for the same month was 8.36 per cent.

It showed that foreign banks succeeded in getting a real profit after deducting eight per cent inflationary impact. However, they gave a negative return to depositors by offering just 5.45 per cent, much below the eight per cent average inflation.

The spread of foreign banks was highest among all banks as average banking spread of all banks in May was 7.3 per cent, slightly less than 7.38 per cent in April 2007.

The comparative study shows that foreign banks have been charging highest from borrowers. The lending rate of foreign banks was rising since October 2006 which was 13.1 per cent and reached 13.75 per cent in November. It was highest in January 2007 reaching 13.88 per cent.

Despite greater competition to attract deposits, the foreign banks kept the deposit rates much lower than the banking spread.

Banking analysts said foreign banks were pioneer in consumer banking and this sector pays highest return to banks which pushed banking spread higher than all banks. They said it was also obvious from the fact that deposit rate of foreign banks was also higher than all banks, except specialised banks.

The average banking spread of all banks has been gradually coming down since February 2007 when it was 7.47 per cent, slipped to 7.3 per cent in May.

The average deposit rate inched up to 4.02 per cent in May from 3.82 per cent in February 2007.

The highest banking spread maintained by foreign banks was a major attraction for foreign banks to enter into Pakistani market. So far, Standard Chartered Bank, ABN Amro and NIB Bank have expanded their operations in Pakistan while more banks are looking for an opportunity to initiate their banking in the country.

However, there is a realisation among banking regulators that the high banking spread is an exploitation of depositors who did never get positive return in real terms. The State Bank has been showing concern asking banks to increase the return on deposits but no action was taken.