Banking industry in Pakistan
Under the supervision of the State Bank of Pakistan, all banks work. State bank of Pakistan divided the operations of the banks into four main segments which is Corporate, agriculture, SME and consumer. All those banks which operate in Pakistan should follow the regulation made by the state bank of Pakistan. SBP give regulations according to which banks supposed to work and constantly keep a pathway that banks are running according to the regulations or not.
Pakistan is on number sixth in the world being a populous state, In Asia its number fourth and in SAARC countries it's the second one, having population of 160 Million or more in which 100 Million is under the age of 25 years and a strong middle class of 30 Million enjoying a lot of benefits from consumer financing.
Banking sector has undergone an important renovation in the recent years and performed as a medium in the restoration of the economy. In the last 7-8 years, too much merger, acquisitions and privatization have made which starts from Muslim commercial bank which was privatized and then Allied bank, Habib bank and United bank from time to time privatized. In those years Standard chartered acquired Union bank and ABN Amro acquired Prime bank. All these show a huge foreign investment, better and increase performance of banking sector through which they can gain more market share and huge paid up capital which is the necessary requirement of SBP in lesser time. By the end of 2009 it is 6 billion and that was 1 billion in year 2000.
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Pakistan banking sector is mainly dominated by 5 large commercial banks. Foreign banks are also in parallel operations but their main focus is only on huge multinational clients. In 1991, local banks got permitted to be formed and now there are 30 such type of banks which are serving only small to medium because of less capital in comparison to foreign banks.
Pakistan financial sector is extremely developed having 12 private, 4 public and 21 commercial banks, mutual funds, leasing companies, DFI and also Islamic venture capital. Over 1 trillion rupees of assets commercial banks have in which domestic banks approximately having 80 percent.
Banks operating in Pakistan
From 1997 till june-2008, Pakistan has a total of 39 banks in which local private banks are 25, other private banks are 8 and foreign banks are 6 in number. In 2007 this figure was 40 but due to acquisition of one local private with foreign bank it decrease to 39.
Statistical-table (SBP, 2008)
Due to an extra ordinary growth and expansion in banking system of Pakistan from the last 10 years, it generate huge amount of profit and contribute a lot to the economy of Pakistan. The following table shows its growth from year 2000 till the second quarter of year 2008.
Statistical-table (SBP, 2008)
The central bank of Pakistan (SBP)
The foundation document of the central bank of Pakistan named the state bank of Pakistan order 1948, remained fundamentally unchanged until 1 Jan, 1974. The state bank of Pakistan act 1956, with succeeding amendments, laid the foundation of its operations today. The central bank head quarter is in Karachi.
The central bank further looks into a bundle of different ranges of banking to treat/manage with the changes in economic environment and diverse purchasing and buying powers. Here are some of the banking areas that the central bank looks into;
- Banking sector supervision in Pakistan
- Micro finance
- Small and medium enterprises (SMEs)
- Minimum capital requirements for banks
- Remittance facilities in Pakistan
- Handbook of corporate governance
- Guidelines on risk Risk management
- Guidelines on securitization
- Procedure for submitting claims with SBP in respect of unclaimed deposits surrendered by banks / DFI's.
There are many other areas of banking to which central bank looks but the above are the main areas. The head of the central bank of Pakistan is Governor who is appointed by the government of Pakistan for its mentioned time.
Consumer banking in Pakistan
Consumer banking is the highest growing sectors of Pakistan banking business and now the main interest spot for the banks. Primarily the consumer banking segment was only identify by the foreign banks but its effectiveness and success attracted others to come towards this area of business but still the main share of consumer banking is in the grip of foreign banks in pakistan.
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Marked to Standard
In a broad sense, institutional planning that provide consumers with financing assistance to improve their consumption and as a effect thereof, improve their standards of breathing should fall within the wide definition of consumer finance as an action.
Consumer banking is a vast industry with huge profits, enormous potential for improving economic situation. But the banking segment has to care extra for its subscribers rather than solely concerning itself. It desires to offer improved services at better conditions and needs to update the consumers entirely and fully about the services.
According to the study, credit cards loans have enlarged its amount from 33.538 billion rupees to 42.822 billion rupees through the first half of the calendar year 2006-07. Personal loans also increased its amount from 120.517 billion in schedule year 2006 to 142.373 billion in year 2007. Auto loans expansion is also very much impressive. Its increase value is recorded as 105.444 billion from 97.777 billion. With all this housing loans have as well increases 11 billion in its worth from the last year.
The state of Pakistan's economy (2004)
As we can see in the above pie graph, that there is huge growth in consumer finance products and services. The middle class peoples who cannot buy luxury products in a one go so they can easily purchase it through consumer finance and can live a happy life. Through consumer finance the living standards of the people of Pakistan is become good and high.
Here now the researcher briefly explains the major products and services of consumer banking through with the help of secondary data.
Auto loans are the obtaining of used or brand new, local or imported cars for private or public use. Auto financing and auto leasing facilities together are offered by the majority of the banks. Salaried persons, professionals, self employed, businessmen and others who meet the provisions and conditions of the bank to meet the criteria for the finance or qualified for the loan. Some banks are as well offers together variable rate and fixed rate options for auto loans. The normal market rate for auto loans is 14-16% but its compounding interest.
The loans taken for purchasing, building or renovating of house is come under home loans. In Pakistan home loans are offered on fixed rate as well as on variable rate. The utmost period offered by the banks for home loans is usually twenty years that's why banks suitably give loans to permanent workers of any firm to guarantee repayment ability.
Personal loans are usually unsecured kind of loans but in certain cases when the sum of personal loans increases the standard limit its remaining part must be protected. Personal loans contain loans for the reason of education, marriage, traveling, purchase of consumer products, furnishing, etc. usually the limit for personal loans is 500,000 Pakistani rupees.
Credit cards simply mean cards which permit a customer to do payments on credit. Supplementary credit cards are measured to be the part of the principle credit card. Originally only foreign banks are offering credit cards in Pakistan but now numerous local banks is also providing credit card facility. Credit card is covered via three networks Master Card, VISA, and American express.
Debit cards are provided to account holders of every bank in Pakistan approximately all the banks are giving debit card facility. The sum used by the debit card holder is straightforwardly debited from the total of the card holder. Debit cards are received at all ORIX networks in Pakistan and it can furthermore be used as ATM cards which are covered by MNET network and I-link and in Pakistan
The state of Pakistan's economy (2004)
All the commercial banks are providing different types of deposit accounts. These accounts are in different ranges from customer to customer to fill up the requirement of each type of customer. Some of these accounts provide high interest whereas some pay low interest and few don't pay any interest. several key categories of deposit accounts are:
- Term deposits accounts
- Foreign accounts
- Current accounts
- Saving accounts
- Business accounts
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Wealth management is a latest variety of service recently introduced in consumer banking segment. It covers every aspects of bank's customer to secure their future; it includes financial consultancy, insurance, investments plans, tax advisory, etc. although wealth management service are mostly providing by few banks only because this a fresh service still bank's customers don't have idea at all about the wealth management.
Approximately all the banks are providing insurance services to a few of their customers but the idea of wealth management is not behind it.
To facilitate its customers, every bank whether local or foreign is offering services of high technological e-banking. These e-banking services allow the banks customers to carry out many banking activities without difficulty and any restriction of time and place. Some of the main e-banking services offering by the banks are:
- Phone banking
- Plastic banking
- Internet banking
- Mobile banking
- Online banking
The state of Pakistan's economy (2004)
SBP prudential regulation for consumer Financing
The development in the banking segment has been not simply in terms of asset expansion and profitability but in addition, in terms of diversification of products as well as risk profile. Approximately all commercial bank now providing consumer financing products and services in Pakistan, so for this purpose effective regulation is must for the consumer banking. In year 2003 State bank of Pakistan provided first edition of prudential regulations in Pakistan for consumer financing.
The SBP in discussion with the Pakistan Banking Association (PBA) as well as other stakeholders has made a proper new set of regulations which cater to the definite separate requirements of consumer, corporate and SME financing. The prudential regulations will facilitate the banks to enlarge their capacity of lending and customer outreach.
Consumer financing means any financing permitted to individuals for fulfilling their family, personal or household desires. The State Bank of Pakistan has separated the financing for consumer in its prudential regulations into four key areas which are;
- Credit cards
- Home loans
- Auto loans
- Personal loans
- The banks / DFIs should get sensible steps to satisfy themselves that cardholders have got the cards, whether it is personally or by mail.
- Banks / DFIs shall give to the credit card holders, the report of account at monthly basis / intervals.
- Banks / DFIs shall be legally responsible for all dealings not approved by the credit card holders after they have been appropriately provided with a notice that the card has been misplaced / stolen. However, the banks / DFIs accountability shall be restricted to those amount incorrectly charged to the credit card holder's bank account.
- Due date for payment should be specifically provided on the accounts statement.
- Maximum unsecured bound beneath credit card to the borrower (supplementary cards shall be considered element of the principle borrower) shall in general not exceed Rs. 500,000/.
- Banks / DFIs may, however, allocate a clean limit beyond Rs. 500,000 but not in excess of Rs. 2 million to their most important customers who have amazing strong repayment capability, moderate debt load and clean track evidence.
- Banks / DFIs may also permit financing under the credit card system in excess of Rs 500,000/- (up to Rs 2 million) to further customers as well, provided that excess amount is properly secured.
- Banks / DFIs shall determine the housing finance limit, both in urban and rural areas, in accordance with their inter credit policy, credit worthiness and loan repayment capacity of the borrowers.
- Banks / DFIs shall ensure that the total monthly amortization payments of consumer loans, inclusive of housing loans, should not exceed 50% of the net disposable income of the prospective borrower.
- The lending bank / DFIs will ensure that the loan amount is utilized strictly for the construction purpose and loan is disbursed in trenches as per construction schedule, loans against the security of existing land / plot, or for the purchase of new piece of land / plot, for commercial and industrial purposes may be allowed.
- The housing finance facility shall be provided at a maximum debt-equity ratio of 85:15.
- Banks / DFIs are free to extend mortgage loans for housing for a period not exceeding twenty years.
- The house financed by the bank / DFI shall be mortgaged in bank's / DFI's favor by way of equitable or registered mortgage.
- Banks / DFIs shall either engage professional expertise or arrange sufficient training for their concerned officials to evaluate the property, assess the genuineness and integrity of the title documents.
- The bank's / DFI's management should put in place a mechanism to monitor conditions in the real estate market (or other product market) at least on quarterly basis to ensure that is its policies are aligned to current market conditions.
- Banks / DFIs are motivated to develop floating rate goods for housing finance, thereby administering interest rate risk to handle / avoid its adverse effects.
- The vehicles to be utilized for commercial purposes shall not be covered under the prudential regulations for consumer financing.
- The maximum tenure of the auto loan finance shall not exceed seven years.
- While allowing auto loans, the banks / DFIs shall ensure that the minimum down payment does not fall below 10 of the value of vehicle.
- In addition to any other security arrangement on the discretion of the banks / DFIs, the vehicles financed by the banks / DFIs shall be properly secured by way of hypothecation.
- The banks / DFIs shall guarantee that the vehicle is accurately insured at all times during the term of the loan.
- The banks / DFIs desirous of financing the purchase of used cars shall prepare uniform guidelines for determining the value of the used vehicles. However, in no case the bank / DFI shall finance the cars older than five years.
- The banks / DFIs should ensure that a good number of authorized auto dealers are placed at their panel to eliminate the chance of collusion or other unethical practices.
- The boundary per person for individual / personal loans will usually not exceed Rs 500,000/-.
- Banks / DFIs can allocate a clean bound beyond Rs 500,000, but not in surplus of Rs 2 million to their most important customers who have astonishing strong repayment capability, moderate debt weight and a clean track record.
In cases, where the loans has been extended to purchase some durable goods / items, including personal computers and accessories thereof, the same will be hypothecated with the bank / DFI besides other securities, which the bank ? DFI may require on it's on.
In case of running finance / revolving finance, it shall be ensured that at least 15% of the highest utilization of the loan through the year is cleaned up by the borrower for minimum period of one week.
With all these regulations central bank of Pakistan bring some changes to it, which is provided to the banks and DFIs to further works under these amendments or changes. And these changes are made by the banking policy and regulations department of the state bank of Pakistan. Last time it was updated on 31st January, 2009.