KARACHI, Aug 8: The Minimum Capital Requirement (MCR) will be increased to $300 million for both conventional and Islamic banks, said banking sources.

Bankers said they had already been informed by the regulators that the capital requirement would be enhanced with other structural changes as part of the 10-year strategy of the State Bank of Pakistan.

Small banks fear that the implementation of new plan with the requirement of $300 million as minimum capital will ruin their business. They feared that it could be a part of the so called ‘consolidation strategy’ of the SBP.

For the last five years the State Bank has been following a policy to reduce number of banks with a vision of consolidation of banking in the country.

“No time-table has been provided for this $300 million capital requirement but we believe a time span of five to seven years may be given to banks to achieve the target,” said a senior banker. He said the MCR will be increased after the end of current target for banks, which is $100 million till end of 2009.

A number of small banks failed to achieve the target of $100 million or they opted to remain far behind the target and their fates were sealed by selling them to big banks. Most of the small banks were sold to giant foreign banks, which increased their share in the banking industry of Pakistan.

“Excluding five big banks and foreign banks, only few banks have potential to reach the new gigantic target of $300 million of capital requirement,” said the senior banker.

However, the move will support the big banks as they would get larger chunk of the banking boom.

An analyst and banking expert said the presence of only few banks would reduce competition in the industry, which could be beneficial for few banks but not for the customers.

“Banking spread is above 7 per cent and is the highest in the region. In the absence or low level of competition one should not hope for better returns to the depositors,” said the banking expert.

At the same time, the quality of services will also suffer. He said the services provided by the small banks were much better than the bigger banks and their fee is comparatively less than the latter.

It was observed that even some big banks fear that the target of $300 million could also hurt them as the requirement is, too, big in the context of current banking industry growth and low performance of the economy.

“If banks continue to grow as they have been performing since the last three years, then the target could be achieved in 6 to 7 years but any setback to economic growth could even hurt the efforts of the big banks to reach the target,” said another banker.

He said any setback to local banks can be advantageous to the foreign banks, which have the capital more than the entire local banking industry.

In the presence of giants like Royal Bank of Scotland, Standard Chartered, and NIB Bank, local Pakistani banks can not compete in an unfavourable situation like sharp decline in the economic growth, he said.