Pakistani banks playing against giants

Updated May 22, 2017


Much is being said about what needs to be done and what goodies will be gotten because of the CPEC.

As ‘a game changer’, it may be a combination of aid with trade and investment at its best. What comes through the course is difficult to forecast.

Pakistan’s banking sector is flexing its muscles to have its share of the pie in the upcoming mega projects. Contrary to the anticipation, the State Bank of Pakistan (SBP), in its second quarterly report for FY2016-17, has admitted that a large chunk of power machinery from China is being imported without using the Pakistani banking channel.

While analysts believe this is owing to the difference between reported imports and actual imports recorded by the Custom department, renowned bankers are less enthusiastic about the banking bonanza in the current situation.

With a declining savings rate, tax regime on bank withdrawal and low interest rates, local banks are pitted against giants. The SBP has issued a banking licence to the Bank of China, the fourth biggest bank in terms of assets.

The Industrial and Commercial Bank of China, the biggest bank of the world, is already operative in Pakistan with two branches. It is anticipated that Chinese banks in Pakistan will play an important role in financing large projects of the CPEC and allied transactions.

“Protocol on banking services to agreement on trade in services between the Government of the Islamic Republic of Pakistan and the Government of the People’s Republic of China” was signed in China on 21 February 2009 and it is an integral part of the agreement on trade.

Under the agreement, a Pakistani bank planning to establish a branch within the territory of the People’s Republic of China shall have total assets of not less than $15 billion at the end of the year prior to the submission of the application.

On Pakistan’s side a foreign bank, whose head office holds paid up capital of at least equivalent to $300 million can have five operative branches, with SBP approval. As an additional commitment, ‘Large Exposure Limit’ under the Prudential Regulations is exempted to Chinese banks.

Strategic Trade Policy Framework (STPF) 2015-18 aims to achieve increase share in regional trade, but does not jot down specific objectives to enhance Pakistan-China. The Sino-Pak trade volume was snailing to $13.77bn in 2015-16.

The proposed Export–Import Bank of Pakistan was scheduled to be established in March 2017. The establishment of the bank was announced in the budget 2015/2016 to promote the expansion and diversification of the export base. However, it is still in the planning and development phase.

The calculus of banking with China is difficult for Pakistani banks, especially with the proposed quantum of CPEC.

An investment of $56bn in a country that holds $21.74bn foreign currency reserves puts a drag on liquidity. Bilateral currency swap agreement is presents as an answer to the problem.

Pakistan and China inked a three-year bilateral currency swap agreement in 2011. The facility amounts to CNY10bn ($1.62bn), and Rs140bn ($1.45bn) and is to facilitate trade and cross currency payments.

The basic concept of a central bank currency swap is to avoid the risk of foreign exchange rate and currency. Cost of this capital is equal to the short term credit interest rate provided by the central bank to a domestic bank with the best reputation.

In short if the SBP employs the CNY capital under currency swap agreement, it is required to pay interest. These currency swaps can be viewed as a credit line that both sides can draw and which need renewal after 3 years. It is not known that the two central banks have accorded approval for the renewal as no instruction from Pakistan’s central bank has been issued after May 07, 2013.

The CPEC is irreversible, one can be sceptical about the Chinese footprint in Pakistan, but cannot deny it. The banking industry cannot afford passivity.

The currency swap agreement between the two central banks will give a positive signal to the market on the availability of liquidity, concessional banking services protocol with reciprocating market entry requirements and strengthening trade with the ‘all-weather’ friend will give small and medium sized banks a level playing field.

— The writer is an investment banker and a visiting faculty at PAF Kiet.

Published in Dawn, The Business and Finance Weekly, May 22nd, 2017