Pakistan's Bankers Clean House


Walk into a branch of any state-owned bank in Pakistan, and you're sure to find poorly equipped, shoddily maintained premises where weary employees pay scant attention to long lines of customers.

That may be about to change. Pakistan's three state-owned banks, which control two-thirds of total deposits in the country, are being put through grueling reforms in preparation for privatization. Balance sheets with gaping holes are being cleaned up, excess staff reduced, and obsolete technology upgraded. New emphasis is being put on customer service.

VISIBLE BAROMETER. "If you walk into a National Bank branch three to four years down the road, there should be no difference between the service you get there and the service at a foreign bank," says Syed Ali Raza, president of National Bank of Pakistan. The veteran banker was previously in charge of Bank of America's operations for Pakistan, the Middle East, and North Africa.

With Pakistan now a pivotal ally in the U.S. fight against terrorism, the reforms also have geopolitical importance. They're a key -- and highly visible -- barometer of whether General Pervez Musharraf's government can succeed in turning the nation around economically. That, in turn, is key to political stability in the region.

Big money is at stake, too. There are no estimates yet of what No. 1 National Bank of Pakistan and No. 2 Habib Bank are worth. But United Bank -- the smallest of the three and likely the first to be sold -- is expected to fetch $150 million to $200 million. Potential buyers include a local group that already owns a bank and two banking groups from the United Arab Emirates.

SUCKED DRY. Pakistan started restructuring its deeply troubled banks in 1997, but the path to reform has been bumpy. National Bank was formed in 1949 as a government-owned entity. Habib and United were taken over during the mass nationalizations of the '70s. Over the years, the banks were sucked dry by a corrupt civil bureaucracy, according to the the bank's current managers. Political considerations rather than merit influenced decisions about lending and employment, leading to huge losses and enormous inefficiency.

"Senior echelons of management were appointed and then transferred at the behest of the civil service," says Ahmed Zafar Khan, president of United Bank. "Because of this, institutional loyalty was lost and commercial agency died with it."

Bad loans swelled to more than $2.5 billion, becoming a huge drag on both the banking industry as well as the overall economy. Meanwhile, the three banks grew into unmanageable behemoths employing a total of 76,500 people and operating 4,800 branches nationwide. Even as all three were fast approaching financial collapse, political interference continued. "Career bankers were ignored, and political appointees were promoted," says Sharif Hasan, a former banker at Habib Bank who was forced to retire in 1997 and now runs his own financial consultancy.

MORE AUTONOMY. Under pressure from the International Monetary Fund, the government finally began making economic reforms in 1997, and the financial sector came under close scrutiny. The World Bank approved a $250 million loan for banking-sector reform, under which one-third of defaulted loans were recovered and operating losses were stemmed. A new "banking court" system was set up to process loan cases. The three banks shed thousands of workers and shut down hundreds of branches to curb spiraling costs.

More important, the banks were given considerable independence. The State Bank of Pakistan, the central bank, was made autonomous, the big three banks were given independent boards of directors, and professional top managers were brought in. "My greatest challenge has been to make people realize that this is a commercial organization, not a [civil-service] organization," says National Bank's Raza.

Progress slowed in 1998, when the government seemed to lose interest. But managers who took over under Musharraf gave reform new life two years ago, moving quickly to streamline operations and improve balance sheets. In October, 2001, the World Bank approved a second $300 million loan for restructuring and privatization.

PRETAX PROFITS. Restructuring is again moving apace. Raza closed 200 more National Bank branches in 2001 and plans to eliminate 3,500 more jobs in the next few weeks. By yearend, the number of employees at the bank is expected to be 12,000 -- down from 23,730 in 1996. The bank is also working to reduce its bad-loan portfolio and is widening product offerings by introducing debit cards, kiosk bill payment, and fund-management services. The bank, which lost $21 million in 1996, posted $17.7 million in pretax profits in 2001.

New management at Habib Bank laid off nearly 12,000 employees and shuttered more than 500 branches. Zakir Mahmood, the president at Habib Bank, also slashed bad loans and unnecessary layers of management while embarking on a marketing drive to boost deposits. United Bank, which had to be bailed out by the central bank in 1997, last year reported a pretax profit of about $18.3 million. After years of drastic downsizing and closing branches, Khan plans to focus on enhancing earnings, upgrading technology, training staff, and improving the ambience of branches.

"Historically, these branches have operated like government offices, with 20% of the space for customers and 80% for the staff," Khan says. His team has recently completed work on a prototype that allocates branch space equally.

All three banks expect political uncertainty, residual bad loans, and higher interest rates to make this a tough year. But Pakistan knows that the only way to sustain reform is to move ahead with privatization, so Pakistan's Privatization Commission will sell United and Habib before the end of the year. And those sales will be important steps -- not just for the industry, but for Pakistan, too. By Naween A. Mangi in Karachi, Pakistan


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