Reminding ourselves that it was the government of Nawaz Sharif who privatized around 80 percent of the banking industry, while recently we have experienced the first smooth democratic transition in the country’s history, now, despite law and order problems, a power crisis and inflation, the banking sector has shown a resilient growth. What is your personal outlook on Pakistan and particularly the banking sector for this coming period?
You’re absolutely right that, for the first time we’ve had a smooth democratic transition through an electoral process from one political government completing its five years term and then the transition to the next government coming into power. So this is a huge plus for Pakistan and it strengthens the fabric of the political system of the country. Now this is particularly important as you know we’ve had periodic military interventions and all this happened at a time when Pakistan was facing the worst terrorist activities for the last five or six years, despite all the chaos and the risks that was there for the political system.
(With regards to the banking sector) the liberalisation, opening up the economy, dismantling the public sector and allowing the private sector to come through privatisation was all done during (Mr. Sharif’s) first term. So his credentials of being a pro-business government is well established. He set the direction of the economy in 1991, which we still see. No government has changed the direction. There have always been tactical differences, but the direction he set in 1991-1993, every succeeding government has followed that.
In his second term, Mr. Sharif established the banking sector reforms. There was an absolute paradigm shift from the past, there was at that time four or five large nationalized banks, almost all bankrupt, including Habib, National Bank, UBL. They brought in fresh management from private sector and the board of directors also came from the private sector and that reform actually set the pace for subsequent privatization in 2002 and 2003 of UBL and Habib, these were huge privatizations.
In late 2008, the international crisis came and Pakistan was also affected by it but not that much as compared to other countries because our banking sector was saved. A large part of our banking sector is liquid being well capitalized and if the economy picks up and goes beyond 5 or 6 percent GDP growth rate, it’s ready to convert the liquidity that is sitting on the balance sheet into actual loans. So from that point of view the banking sector, is very well poised to see a growth that might take place in the economy but before all that the regional, and this where the government is coming in handy, this government is very focused on improving the relationship with the neighbours particularly India.
My view is that Mr. Sharif has established his credibility with Indian leadership, that they’ve started saying this guy is serious about the future because he’s established his credibility with the Indian leadership, the western capitals are also smiling at him now. Why now? This India-Pakistan relationship in the context of 2014 of what’s going to happen in Afghanistan, is not just a bilateral relationship it has become a regional context. It affects everybody. If Pakistan and India are smiling at each other and they are more or less on the same page of how the transition in Afghanistan should take place, imagine the sigh of relief in the western capitals. Rather than being loggerheads because India already had a footprint in Afghanistan. So this is what the world is expecting because of its stance towards India, Sharif is getting a lot of attention from the western capitals.
That’s one of the things and the other is terrorism. Pakistan is facing for the last couple of years. How do we address that? That is a huge challenge for the Pakistani political leadership not just the government, it’s still struggling to have a consensus whether to fight or not, whether to negotiate or not. I think the idea of negotiating first and who knows what will happen it may succeed or maybe not. Even if it does not succeed then at least there will be a political consensus for the people to go ahead and fight or to try at least.
So that’s the challenge and if the violence is controlled then the GDP growth rate can very quickly cover the 5 or 6 percent plus, which is what we need. We’ve struggled at an average of 2 or 2 and a half percent GDP growth for the past five or six years. We need to go beyond that.
Regarding taxes, the IMF said you’re doing very well, so it looks like it’s going in the right direction. Meanwhile, NBP has reached the landmark of becoming the first Pakistani bank to cross the 1 trillion rupee mark. What would you define as the main drivers behind this growth strategy? Would it be the reducing of costs or widening of the product range?
If you look at the overall large banks in Pakistan they have too much of treasonable sitting on their balance sheets, so that is a good sign. It means they are liquid at the same time it doesn’t speak too well in their economic activity that means everything is going to the government. Some of the banks have more treasonable in their books than the loans. National Bank is different because of the public sector, they’ve been in the forefront of lending to the private sector.
Right now the loan book of the National Bank is 700 billion plus which is much larger than Habib Bank and the rest of the banks. So National Bank has been doing its bit in the market right now. What we need is the other banks to also come forward and play their part.
As far as National Bank is concerned, National Bank is a bank for the government also. It’s a very service oriented part. There’s a lot of cost associated with it but then of course you get locked in business from the government also. All these pensions are distributed for the government from the branches of the National banks and so many others.
The challenge for National Bank is firstly, to get very quickly the technology platform in place. I think they started a little later than the rest of the banks but right now more than a thousand branches are in line and the core banking system that was being implemented has started in some 17 to 20 branches and it will very quickly pick up with the rest of the branches. If you want to compete effectively and if you want to provide good services to your customers you must have a world class technology platform and it is a world class system they are implementing at this point in time. So that’s the number one challenge in the next two years to get a technology platform as good as anybody else in the market.
National Bank will always be in the forefront of doing products, because of the government ownership, and doing products for small borrowers. Pakistan’s banking sector lacks lending opportunity to small borrowers. There will always be pressure on National Bank. For example, a new product is going to be introduced which is directed towards the unemployed youth. It’s going to be 50 percent for females and males and we are going to devise as much as possible to have the risk management side covered as well. This could be hundreds or thousands of new borrowers coming in.
Is that within the national youth policy of the PM?
Yes, National Bank being a Government owned bank has to look forward. We need to have a product which the risk management side is also covered and from the point of view that the credit should reach the small borrowers as well. A portion of the balance sheet should be allocated, you can say, to bucking of entrepreneurs. We will be distributing these small loans to people who have come up with some small businesses. That’s the next challenge, how we handle this from the risk point of view and from a money making point of view. Not competition so much because I think private banks are still holding back all that.
Doesn’t this also allow you to cross over your other products?
Sure, if some of these guys succeed they will always bank with us. We will test and review them to evaluate how this will go on. As I said we need to be mind full of the risk management side of this project, but at least we are making an effort.
Another of the challenges that I see within the Pakistani economy and the National Bank of Pakistan of course is the remittances. Despite the government’s remittances initiatives of which NBP is the pivotal institution, there’s still large amount of overseas money that comes through informal ways. Keeping in mind the UK accounts for around 14 % of the remittances coming from abroad, what is the strategy NBP has to inspire more confidence to get more money through formal channels?
If you look at the remittance business it has grown in National Bank. NBP wasn’t very active in the remittance business in the last 4 or 5 years. NBP has business in about 20 countries now, and it has a strategic presence in the UK market. This United National Bank which is partly owned by NBP and UBL actually has physical presence in UK.
One of the strategic thrusts in the next 3 to 5 years from the business point of view because to attract Pakistani remittances within Pakistan from both Middle East. Now Saudi Arabia National Bank is the only Pakistani bank which has a branch in Saudi. We need to leverage that more. The single biggest chunk in remittance comes from Saudi Arabia. My focus on remittance is going to be from Middle East, Canada, US and from UK. These are the big sources and I can very comfortably tell you that if it is, let’s say, a little over a billion in the next two years we can more than double this and we will double that.
Partly, that focus on the technology platform is also for this. If we have a technology platform and because we are improving the service quality of the branches we can attract more remittance business through us. So that technology platforms crucial to build that remittance business.
Foreigners have about 3 billion plus US dollars in the KSE, so what would be your strategy to investment in the KSE?
Karachi Stock Exchange is a separate program and immediately upon the change of government we had a seminar in New York. Then in July we had in London a partnership with London Stock Exchange. Now in January we’re going to have it in Hong Kong. In KSE what we do is take ten or twelve corporates of Pakistan then these corporates have individual meetings with the front managers.
These are the things that are attracting the foreign investors, making them look at Pakistan’s capital market. One of the critical things that we need to do more on the capital market right now is on equity level. The bulk of trading takes place on the debt side so we are now at a very advanced stage of making the Ministry of Finance and Central Bank agree that they should allow trading of the treasurables as the first step on the Stock Exchange.
By the way, foreigners can buy debt also and I think we can attract a large number of them but the main purpose is to eventually be able to list debt securities on the stock exchange because we need to raise massive funding for infrastructure and development. The bank’s balance sheet cannot handle that on its own so we need to come with an infrastructure bond, which will only be successful if there is regular trading on the stock exchange and liquidity in those instruments. So the debt side is the real challenge in the next 12 months on how to get the debt side alive on the Karachi Stock Exchange.
At the same time, KSE is going through its own change. In 2012 the KSE became demutualized. What is happening now is that we are in the process of buying a strategic buyer for KSE. Deutsche Bank is our advisor and they are going to start the road show in January and, who knows, in the next couple of months we might have a strategic buyer, an outside investor running KSE so then 40 percent of it will be given to them.
There’s a lot of investment expected, especially FDI in the infrastructure, power and energy sectors. How is NBP positioning itself to become a vehicle for these investments?
National Bank will have a part in it. For example, China. China and Pakistan have signed this economic corridor, that’s a huge program. I think National Bank eventually will have to play a role in making the Pakistan-China development fund. China is not going to bring in 100 percent money on their own.
Coming all the way from the top border down to Gwader, imagine the construction activity which will be generated by that and the jobs that will be produced within. Gwader is handled by Chinese which I’m sure is giving sleepless nights to a lot of countries, say, Middle East.
If we handle the transition of Afghanistan well, Iran is also opening up, and if we start trading with neighbours like India, can you imagine the economic hub Pakistan can be? So these are very exciting yet tough times for Pakistan. Difficult decisions to be made but they can really have good results.
Personally, you’ve have been wearing two hats. One leading NBP and the second KSE. How do you manage this combination and what do you think is the biggest challenge? What do you see for the future in a more personal way?
I’m enjoying it right now. I became chairman of KSE two years back and like I said, that was itself going through a transition period. I’m just heading the board now along with SCEP. In the last 5 years massive work has taken place on the day to day governance of the stock exchange. We’ve spent a lot of time on doing the AML/KYC on the stock exchange as much as we can do. The governance of KSE has improved a lot since the 2008 crisis and in that one has to compliment.
Finally, what would be your personal outlook or message to the potentials UK investors?
I’m not saying invest in Pakistan and I’m not saying this is the time. But I can very emphatically state that every potential investor needs to take time out to have a close look at Pakistan.
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