'Effect of Global Financial Crisis on Banks in Pakistan\r'

'CHAPTER #01 BACKGROUND OF SUBJECT AND account OF PROBLEM |1. 1 |Introduction | |1. 2 | development and Present Status | |1. 2. 1 |Pakistan’s bounding atomic number 18na and Foreign edges | |1. 3 |Statement of Problem | |1. 4 |Signifi heapce of Study | |1. |Scope of the Study | |1. 6 |Delimitations | | | | 1. 1Introduction: The pecuniary crisis, which has been developing at W wide-cutly Street, has got batch worried in developing countries around the humanness. The pullulate exchanges, in developing countries live crashed and things look fatal for the pecuniary grocery stores.The people atomic number 18 drawing parallels with the bully Depression of 1929, solely this time the world preservation seems remote more(prenominal) reliant and countries ar far more intertwined with each early(a). Hit by an unusual series of multiple events and shocks, the ball-shaped Financial corpse is in a state of cryptical distress. unity after a nonher, large world(a ) banks fool face extensive losses, some were undefendeded to runs, others wrapped up their business, precondition nonwithstanding others went for bail outs, mergers or other forms of restructuring. old-hat markets tumbled, indices decd and their market loaded down(p)(p)ization was severely eroded.The pecuniary crisis, triggered by an isolated problem of subprime mortgages and other alternative enthronisation vehicles which constituted scarcely a micro balance wheel of world(a) financial summations, first hit sensation orbit of the economy i. e. hold, and has instantaneously transmitted its transmittal effect across all segments of financial markets and institutions, with mouthover cause into the authoritative sphere of influence. The orbicular economy is now witnessing a signifi earth-closett s diminished bundle after a continue period of harvest-festival. What was perceived initially as stringently fluidity? runch in advanced financial markets ha s now turned into a solvency crisis. The depth and largeness of the financial crisis is yet not known. The crisis has generated instability by speculative concern, which has far-reaching implications around the globe. The crisis has the potential to disrupt the precise foundations of the worldwide mo profitsary governing body. The short letter is not moderate to the meltdown of financial markets, the real economy at the national and world(prenominal) level, its institutions; and its productive structures argon excessively in unmanageabley.This financial meltdown inevitably, backlashes on consumer markets, the housing market, and more broadly on the process of enthronization in the production of goods and services. 1. 2Evolution and Present Status Pakistan is life history in a senior amplyly integrated world and a major(ip)(ip) turmoil of this magnitude and would decidedly create certain implications for Pakistan’s economy. Pakistan already reeling from high fo od and fuel prices could face adverse consequences of the global financial crisis. The realm’s economy is already confronted with worst kind of macro sparing imbalances and obviously submit financing desperately.Pakistan’s economic arouseth has slowed down and the ripple effects of this financial crisis whitethorn or may not hit with same ardor or severity as it is doing to the developed world, yet calm in that respect are various take through which the crisis may hit Pakistan economy. The crisis affected area, get together States and Europe, hold a fundamental value for Pakistan’s economy. The financial turmoil is more then probable to affect Europe, Japan and North American countries with amply intensity. Pakistan’s out-of-door field comprised of trade, alien investment, remittances, and majuscule flows is interwoven with these countries.All these indicators of impertinent welkin have more than 50 per centime of the stake in this regi on. The growing model being followed in Pakistan over the days is highly dependent on remote pileus inflows, mainly from these countries. More than one-half of Pakistans remote trade is dependent on these countries. The country could be brook if demands for its export products dropped significantly, impertinent investment declines substantially and if the name of trade are affected. Pakistan has a very ine finalic import structure and if exports are hit by a crisis than the on handout account deficit is presumable to go beyond the sustainable limits.There is an agreement among analysts that countries with heavy remote financing needs are potentially more vulnerable to a commendation crunch. Pakistan’s current account deficit had already moved(p) $14 million which is 8. 5 per cent of its GDP, in 2007-08. In the current monetary year, the ambitious drop-off in the CAD is planned but still need a financing of around $12 billion. If import compression measures fail than the financing needs would be more than that. Pakistan’s external inflows projections hinges upon inflows from GDR’s and sovereign bonds in the fiscal year 2008-09.In the current situation any inflows under these heads are most unpotential. example & Poor has downgraded its long-term credit order for Pakistan to triple c plus and this is the third downgrading of this schedule year. This rating forget heart some investment prospect as tumefy. The current crisis is aggravated by rising cost of external borrowing on the one hand and scarcity of availability of external inflows coupled with volatility of oil prices in the global market on the other. Internal security situation is adding miseries to our external woes.Non-debt creating inflows like FDI and portfolio inflows had shown great resilience to external crisis last year but sustainability of this resilience is likely to be hurt. 1. 2. 1Pakistan’s positing Sector & Foreign trusts The major area of the economy of any country is its financial sector, in late(a) times financial sector has received renewed focus in the world. And within the broad domain of the financial sector, it is the banking industry that has been the centre of attention of attraction for the disposal and policymakers, particularly in the adorn of the Universal argoting Model. banking is one of the most sensitive businesses all over the world. edges plays very important role in the economy of the country and Pakistan is no exception. commits are not only the custodian of the assets of the general masses but in any case act as a major financial intermediary of the country. The banking sector influences many various but integrated economic activities like militarization of re bloods, collection & distribution of public finance.Pakistan’s financial sector consists of Scheduled Commercial depository financial institutions which embarrass nationalized, contradictory, and p ersonal banks; and Non-banking Financial Institutions (NBFIs) which include Development pay Institutions (DFIs), enthronisation Banks, leasing companies, modarabas, and housing finance companies. Scheduled Banks and NBFIs (excluding modaraba and leasing companies) are both(prenominal) regulated by the State Bank of Pakistan’s Prudential Regulations, albeit through different wings, and are subject to different SBP restrictive unavoidablenesss such(prenominal) as large(p) and runniness reserve requirements.The banking sector in Pakistan has been going through a nationwide but compound and painful process of restructuring since 1997. It is educateed at making these institutions financially sound and forging their links firmly with the real sector for promotion of savings, investment and growth. Although a slay turnaround in banking sector exertion is not expected till the completion of reforms, signs of improvement are visible. The almost simultaneous nature of var ious factors makes it difficult to disentangle signs of improvement and deterio symmetryn.The central bank has been succeeding(a) a supervisory framework, CAMEL, which involves the analysis of six indicators which hypothe surface the financial health of financial institutions. These are: 1) great Adequacy, 2) Asset Quality, 3) Management Soundness, 4) Earnings and Profitability, 5) Liquidity and 6) sensitiveness to Market Risk. Pakistan’s banking sector is made up of 53 banks of which there are 30 commercial message banks, four specialized banks, six Muslim banks, sevener development financial institutions and six micro-finance banks.According to the State Bank of Pakistan’s (SBP) Financial Stability Review 2007-08, â€Å"Pakistan’s banking sector has remained remarkably brawny and alive(p), despite set somewhat pressures emanating from weakening macroeconomic environment. According to Fitch Ratings, the international credit rating agency dual headqua rtered in New York and London, â€Å"the Pakistani banking placement has, over the last decade, gradually evolved from a weak state-owned system to a slightly healthier and active backstage sector driven system. |BANKS IN PAKISTAN | |[pic] | |PUBLIC SECTOR BANKS | | | | first gear Women Bank restrict | |The Bank of Khyber | |National Bank of Pakistan | |The Bank of Punjab | |SINDH BANK | |ISLAMIC BANKS | | | |BankIslami Pakistan express | |Emirates world(prenominal) Islamic Bank | |Dawood Islamic Bank moderate | |Meezan Bank express mail | |Dubai Islamic Bank Pakistan restrict | |PRIVATE BANKS | | |The Royal Bank of Scotland especial(a) | |JS Bank limited | |Allied Bank trammel | |KASB Bank Limited | |Arif Habib Bank Limited | |MCB Bank Limited | |Askari Bank Limited | |Mybank Limited | |Atlas Bank Limited | |NIB Bank Limited | |Bank Alfalah Limited | |Saudi Pak Commercial Bank Limited | |Bank Al Habib Limited | |Soneri Bank Limited | |Crescent Commercia l Bank Limited | |Standard Chartered Bank (Pakistan) Limited | |Faysal Bank Limited | |United Bank Limited | |Habib Bank Limited | |Habib Metropolitan Bank Limited | |FOREIGN BANKS | | | |Albaraka Islamic Bank B. S. C. (E. C. ), | |The Bank of Tokyo-Mitsubishi UFJ Limited †Pakistan trading trading trading trading operations | |Citibank N. A. †Pakistan Operations | |HSBC Bank Middle East Limited †Pakistan | |Deutsche Bank AG †Pakistan Operations | |Barclays Bank PLC | |Oman International Bank S. A. O.G †Pakistan Operations | |DEVELOPMENT FINANCIAL INSTITUTIONS | | | |House make Finance Corporation | |Pakistan Kuwait investiture go with Limited | |Pak Brunei investment corporation Limited | |Pak Oman Investment fraternity Limited | |Pak Iran Joint Investment Company | |Saudi Pak industrial & Agricultural Investment Company Limited | |Pak Libya Holding Company Limited | | chinaware Investment Company Limited | |SPECIALIZED BANKS | | | |Industrial Development Bank of Pakistan | |The Punjab Provincial Cooperative Bank Ltd | |SME Bank Limited | |Zarai Taraqiati Bank Limited | | small FINANCE BANKS / INSTITUTIONS | | | |Khushhali Bank Limited | Rozgar Microfinance Bank Limited | |Network Microfinance Bank Limited | |Tameer Micro Finance Bank Limited | |Pak Oman Microfinance Bank Limited | |The startle Micro Finance Bank Limited | As of end-2008, data from the banking sector confirms a slowdown (after a multi-year growth pattern). As of October 2008, meat deposits fell from Rs3. 77 trillion in September to Rs3. 67 trillion. nutriment for losses over the same period went up from Rs173 billion in September to Rs178. 9 billion in October. In the meanwhile, the SBP has jacked up economy-wide rates of touch (the 3-month treasury bill auction has seen a endure from 9. 9 share in January 2008 to 14 share as of January 2009 and bank lending rates are as high as 20 percent). Overall, Pakistan’s bankin g sector hasn’t been as prone to external shocks as have been banks in Europe. To be certain, liquidity is squiffy but that has petty(a) to do with the Global Financial Crisis and more to do with heavy government borrowing from the banking sector and thus tight liquidity and the ‘crowding out’ of the private sector. Increased contention in the banking sector pass on force littler banks to either sell out to other bigger banks or merge. A small capital ass testament in like manner restrict branch expanding upon of little banks, forcing them to focus on relatively smaller sell clients.Hence, it is foreseen that a major merger/ encyclopaedism potential in the banking sector. Competition would excessively spill over to other customer services such as provision of ATM machines and better banking facilities. Again, only the larger banks would be able to invest in automation technology and branch expansion essential to improve efficiencies and mobilize cheape r funds. Foreign Banks (FB) comprises 24% of total advances and deposits within the banking system, but as a parting of total profitability they are far ahead. A major constraint for orthogonal banks is the restrictions military positiond on branch expansion by the SBP. This should be tally to liberalization policy to relax restrictions on unknown banks in emerging economies.Traditionally, the remote banking focused on short term trade finance, targeting mainly low endangerment blue chip clients and high net worth individuals. More new-fangledly, remote banks have excessively expanded into merchant banking, capital market operations, and consumer/retail banking. Foreign banks have been extremely successful in capturing a major market share of consumer banking business, curiously that of credit cards. Head office support in terms of international network and technology has enabled the unconnected banks to become important players in the corporate and consumer banking aren a. The deposits of alien banks as ratio of total deposits improverd to 27. 99 per cent in 1994-95 as compared to 21. 3 per cent in the preceding year. The advances of foreign banks as ratio of total advances have also shown an increase from 17. 64 per cent to 20. 38 per cent during the same period. Citibank take in a pre impose profit of Rs. 1191. 82 million and thus it became the top profit earner among the foreign banks in Pakistan. The presence of foreign banks in Pakistan expands access to credit as vigorous as financial services, which can spur efficiency and innovation in home(prenominal) banks, however, ripple effect of shocks from the credit squeeze in the US has pretend on local financial markets through these banks. Pakistan has concentration of almost all foreign banks in the country.They account for one-tenth of deposits in the country in 2007-08. There are substantial changes taking place in the interrelation with the structure-forming elements in the global fina ncial market which is seriously affecting the financial-credit machine in the developing countries, which have not yet developed the financial and economic structures. Countries like Pakistan sensitively react to the structural changes in the financial space. The banking and the entire financial system is much tougheneder now, after old age of restructuring. Pakistan’s financial institutions had not invested in derivatives that had picture to risky investment bankers.Moreover, better supervisory watchfulness and risk management practices introduced by the SBP have reinforced bank balance sheets while Bank asset quality, profitability, and capital adequacy have also amend remarkably in recent years. If the small size of the Pakistan’s financial market has traditionally been a hindrance to a more efficient economy, it may actually prove to be an advantage in the current situation. There are deficiencies in the operations of the banking system, and it does not fulfi ll its function as finance intermediary. Hence the traditional channels of influence betwixt financial market and real economy do not function in all respects. The banking system is on strong footing and has long term potential †a feature which has served to attract a substantial amount of FDI in the sector, with established global financial institutions now active participants in the domestic financial sector,” it has been well? governed and being in private hands under professional management, has witnessed outstanding financial effect during the last a couple of(prenominal) years. With strong regulatory oversight, there has been a significant enhancement of capital and risk? dull capital adequacy, supported by high provisioning requirements which were tightened in 2007. Stringent loan provisioning requirement has create sufficient reserves against the NPLs’ portfolio.In contrast to the liberalized financial system in the west which withalk its toll in the form of the current global financial crisis, there are stringent regulations and decent policies in place to help the banking system manage its risks. It is observed that aggregate financial soundness indicators have improved since former(a) 2000, and continue to exhibit strong performance. â€Å"Tighter provisioning requirements may have reduced profits, but have positioned banks well,” and added ongoing desegregation and mergers have enabled a number of banks to position themselves better. The studies have shown that solvency profile has improved, and given the pressures from the macroeconomic environment, there is an characteristic of marginal deterioration in asset quality, which banks are well? equipped to handle. Stress tests conducted on June? 008 data indicate that the large banks are relatively robust, with the strong point and small? sized banks positioning themselves in break markets. Capital adequacy of the banking system is strong, 12. 1 percent at end? Ju ne 2008, well above the internationally acceptable minimum requirement of 8. 0 percent, it give tongue to and added core capital constitutes about 80. 0 percent of the total capital, and Tier 1 to risk weighted assets ratio of the banking system is at 9. 7 percent. â€Å"This strong capital ascendant is accompanied by adequate reserves on the back of stringent provisioning requirements against assort assets †the net NPLs to net loans ratio is reasonably well? contained i. e. at 1. percent in June 2008, comparable to international best standards,” the Report pointed out. Profitability of the banking system continues to be impressive, largely emanating from the persistent growth in high? yield earning assets and expanded business volumes. Before? tax Return On Assets of the banking system remains strong at 2. 3 percent in June 2008. The strengths built up over the years are now coming in handy in managing the recent financial strains. The Government’s and public sector organizations’ excessive borrowings from the banking system posed another altercate for the banking system. Notwithstanding, the liquidity strains were temporary and the inter? bank market is now functioning normally. Albeit going forward, the banking sector faces a significant challenge in maintaining its deposit base and in attracting new deposits, given the three rounds of increase in the rates of return on NSS instruments in the first few months of FY09. This leave behind in a way force them to enhance the quality and returns on their liability products, and strengthen competition,” it pointed out. Liquidity position of banks also had an impact on the Non? Banking Finance Companies (NBFCs), whose main source of funding continues to be credit lines from banks. â€Å"A broader assessment of financial stability indicates that the financial sector is too bank? centric, and the outreach and growth of the Non?Bank Finance Companies and the restitution sector ha ve languished in recent years,” it give tongue to and added NBFCs face direct competition from banks and are not likely to grow significantly until their funding sources and be are streamlined. An excessive dependence on the banking system to meet the financing needs of the economy, as well as other participants of the financial sector, is quite knockout in comparison with other emerging economies, where in general, the growth in other components of the financial sector, such as capital markets, complements and supplements the financing capacity of the banking sector. charm financial markets (money market and foreign exchange market) remained resilient to the developments in the macroeconomic environment and functioned well in maintaining financial stability.Despite several achievements of the financial sector in recent years, financial depth and penetration in Pakistan continues to be low, and SBP’s financial inclusion schema are aimed at extending the net of fina ncial services. A lack of confidence in banking system has also traditionally prevented a significant sector of households from charge their savings in banks. Hence, the impact on households of a possible burst in bank insolvencies pull up stakes be minimal. In addition, the majority of deposits are in the state-owned banks or banks with sizeable government presence. Indirect effects may thus become prominent in evaluating the consequences of the financial turmoil on the real economy.The tight liquidity situation particularly hampers the operations of small banks and banks with limited resources, so the possibility of insolvency and bankruptcy cannot be ignored for some banks. Pakistan is facing a doodad of financing huge fiscal deficits in 2008-09 and if liquidity constraint remains intact with limitations on external financing, the demand for State Bank resources will grow at a faster pace. The unwillingness of the SBP to finance the deficit may have serious implications for fi scal operations. This will attract major cuts in growth enhancing development expenditure because current expenditure offers little room for adjustment. The development expenditure has crucial for business organization creation and interlink ages in the economy.The refinancing of fiscal deficit without SBP finances may prove to be difficult, and will further tighten liquidity conditions and could lead to insolvencies for banks as well as add further pressures on taxation options. 1. 3 †Statement of the Problem: This aim of this research is to analyse the working of foreign banks, their operations and situations after global financial crisis and the services they are providing. The benefits which they are providing to different financial and non financial organizations. The activities and practices of foreign banks direct particularly in Pakistan. Their importance in the economy and financial sector of Pakistan. The major reasons for their decline/incline nowadays, Problems fa ced by them in recent time and their tough competition from other financial institutions performing in the market.There are many risk factors that are blocking the performance of foreign banks, so in this research it is tried to get the deep understanding of impact of global financial crisis on the foreign banks and the following things: 1- The Factors involving the operations of foreign banks in the lead and after global financial crisis. 2- The upcoming opportunities of foreign banks operating in Pakistan. 3- What are the problems faced by foreign banks. 4- How are the risk factors hindering the performance of foreign banks. 5- What products should be focused by foreign banks for growth in future. 6- The strategies for the regulation and development of foreign banks in Pakistan 7- The Initiatives that should be taken to bolster foreign bank operations in Pakistan after global financial turmoil. So the statement of the problem can be: IMPACT OF GLOBAL FINANCIAL CRISIS ON THE FORE IGN BANKS OPERATING IN PAKISTAN”. 1. 4 †consequence OF THE say: This melodic theme is useful in profoundly understanding the activities and services provided by the foreign banks operating in Pakistan . Their importance in the economy of Pakistan, this report will not only gives info about bring out status but also gives comprehensive information about the contribution and impact of foreign banks in the financial sector of Pakistan. This report is also useful for the students and teachers providing complete theoretical and practical information about foreign banks, their functions and operations with wider perspective.This research will be beneficial for the corporations, and researchers who are interested in knowing about the services of foreign banks that will be beneficial for them. This research will also be cooperative for the foreign banks in getting information about their present status and future prospects, the opportunities and threats they are facing, a nd the risk faced by them in Pakistan and what new products and services they can indulge in to grow in the future. This research is also helpful for me to enhance my knowledge in understanding the operations and difficulties faced by the banks. 1. 5 †SCOPE OF STUDY: This study or analysis of the foreign banks will help in identifying the impact of global finacilal turmoil on foreign banks in the financial sector of Pakistan.It includes detailed study of top renowned foreign banks operating in Pakistan. The activities & services provided by them and performance and growth during the financial crisis. 1. 6 †Delimitations: The results are purely based on the information that is provided by the institutions, investors and from other secondary sources. The key factors that may hamper the present and future performance of investment banks are the economic conditions and government policies. This research is limited to the study of the impact of global financial turmoil on few of the foreign banks operating in Pakistan; these banks mainly include Standard Chartered Bank, Citi Bank, RBS Bank and HSBC Bank.\r\n'