KARACHI, March 11: Foreign banks have become eligible to set up their subsidiaries in Pakistan under the WTO rules if they find that branch network arrangements have become impediments in the growth of their business and they want to be incorporated locally, sources said here on Monday.
The number of branches that foreign banks can open is currently linked with the size of the capital and these are 100 per cent outside-owned.
However, the option to open the subsidiaries will rest entirely on the individual foreign banks and the Central Bank would be obliged to allow them to be incorporated locally. Under WTO, it is optional and there is no requirement as such, says Ali Reza, President, National Bank of Bank.
In its budget for next year, India has declared that it would allow foreign banks to float subsidiaries. Earlier, Reserve Bank of India declared that foreign banks including those with a branch, could acquire 49 per cent equity in private banks. The foreign holdings in state-owned bank remains untouched at only 20 per cent.
Ali Reza told Dawn that “you have the advantage if you are a local bank,” and added “you can open as many branches as you want. You can expand faster. These subsidiaries can also acquire local entities.”
Ali Reza who is a former country head of the Bank of America said it is also much easier to regulate local banks rather than a branch of a foreign bank. There are benefits for the regulators as well as institutions in incorporating locally.
NBP and UBL have set up in the UK a subsidiary, Pakistan International Bank, and similarly, the HBL and ABL have merged their branches to create a local bank of their own. But this has been done under the mandate of the Bank of England, which wanted only two Pakistani foreign banks to operate in Britain. This basically required merger of bank branches. These subsidiaries will target the Asian community where there is niche advantage.
On the prospects of foreign banks setting up their subsidiaries in Pakistan Ali Reza observed that some banks may find it more comfortable to run as a branch and others might grow and feel there is impediment in their growth and they might like to incorporate locally.
Pakistan has 3-4 banks incorporated locally with majority of foreign stakes, essentially Arab investors, but no subsidiary of any major Western Bank. Three major players, Citibank, Standard Chartered Grindlays and ABN-Amro, work with branches.
On the other hand, the number of foreign banks has been shrinking over the years. The President of Pakistan Banks Association, Zubyr Soomro says that some have withdrawn because over the years these banks have expressed dissatisfaction and some have tightened on the global networks. Pakistan has been one of those countries that have suffered.
He thought that life was made difficult for them. The tax burden has been so excessive that they could not send anything to their head offices. Those who feel that there are long term potential, are sticking around.
Zubyr Soomro says that there is no justification for taxing banks at higher rates than the other corporates.
Supported by the IMF, the government had announced in current year’s budget that it would cut the tax rate on banks earnings to 50 per cent.
During the visit of President Musharraf to the State Bank and meeting with the bankers on Saturday, Finance Minister Shaukat Aziz reportedly informed the meeting that in the next budget he would announce the tax rate reduction from 50 per cent to 46 per cent. The enabling environment for creation of subsidiaries is being improved, says an investor.