A CASH investment of over Rs3.2 billion, virtually a bailout package from the Khyber Pakhtunkhwa government, has enabled the Bank of Khyber to meet the central bank’s paid-up capital requirement for 2011.

“We are the SBP’s compliant bank at least for 2011 and it’s because the provincial government trusts us,” Bilal Mustafa, the Managing Director of BoK, tells Dawn. The BoK set up in 1991, was required to raise its paid-up capital up to Rs8 billion by December this year.

The bank management came up with second right issue to raise the  needed capital. The response from the private sector was nominal, leaving the provincial government to pick up bulk of right shares offered, explains Mr Mustafa.

Being the major shareholder, the KP government subscribed the right issue entitlement while taking also the unsubscribed portion of the lot with an investment of Rs3.224 billion.

The BoK’s paid-up capital now stands at Rs8.228 billion. It will have to generate one billion rupees annually to raise its capital reserves up to Rs10 billion by 2013. Earlier, this requirement was Rs23 billion, but the central bank scaled down the figure following the inability of the financial institutions to achieve the difficult annual targets.

The government’s stakes in the bank have risen to 71 per cent from 51, with 29 per cent of the shares owned by the private sector.

The BoK privatisation remained on the agenda from 1994 till 2002. But owing to government’s reluctance, both the international investors—the World Bank and the German Development Bank— pulled their capital out of the bank, recalls Dr Mohsin Khan, a former senior executive of the bank.

However, in 2004, the MMA government had to go for Initial Public Offering (IPO) to offload up to 49 per cent shareholding in the bank to meet one of the major conditions of the World Bank that was providing a $270 million loan to the BoK.

The provincial government reduced its shareholding to 51 per cent first through IPO and then the first Right Issue in 2004 and 2007, respectively. Since then, the private sector has been maintaining 49 per cent stakes in the bank.

Dr Mohsin argues that under the present circumstances no private investor is ready to invest in banking industry and that too in a entity that is operating in the country’s most volatile region. “In the given circumstances, the government has no optionbut to raise its equity in the bank. But now it is up to the bank’s management to take advantage of this support and come up with some viable products that can turn it into a commercial entity,” explains Dr Mohsin.

The provincial cabinet in its meeting on December 2 last year had decided to offer management control of the BoK to any private party having at least 26 per cent shareholding. In line with the decision, the provincial government appointedfinancial advisor to prepare the bank for privatisation. “It is obvious that when investors are not ready to buy its shares, no one will be willing to have its management,” opines a senior executive of the BoK.

The BoK chief Bilal Mustafa, however, holds a different view. He claims the growing government shareholding and the proposed handing over of management control of the bank to private sector are two different things.

“The financial advisor has completed the first and second phases of the proposed handing over the management control to a private party. The moment government finds a suitable and financially viable buyer, it would not hesitate to sell the bank, ” argues Mr Mustafa.

The BoK chief is not worried about the future MCR liabilities, saying “we expect a good profitin the coming year and can raise the paid-up capital up to Rs9 billion.”

In the half year ending June 30, 2011, the bank made a pre-tax profit of Rs705 million and after-tax profit Rs460 million. The deposits increased by 23 per cent from Rs36,981 million at the year end 2010 to Rs45,384 million as on June 30, 2011.

Advances grew 16 per cent. Investments have shown a significant rise from Rs19, 853 million to Rs29,341 million— an increase of 48 per cent.

According to him, the SBP has permitted the bank to open 12 new branches in the country that will take the tally to 62.