Muhammad Aurangzeb, President & CEO, HBL about the transformation he envisions for HBL and the impact of the current economic situation on those plans.

AURORA: You have worked abroad for several years in different capacities within the banking sector. What brought you back to Pakistan and how will that experience translate?
MUHAMMAD AURANGZEB: I left Pakistan in 2001. At that point, I was the Country Manager at ABN AMRO. The move took me to ABN AMRO’s head office in Amsterdam, where I assumed a number of roles including Global Head of their Wholesale Lending Business. When ABN AMRO was bought over by the Royal Bank of Scotland, they asked me to become their Head of Investment Banking for Southeast Asia and I moved to Singapore. From there, I moved to J.P. Morgan and my last position was as their Head of Banking for Asia Pacific. I was away for 18 years and I came back for personal and professional reasons. There was never a doubt in my mind that I would come back; it was only a question of when. When the HBL opportunity came up, I raised my hand to be considered and I am very humbled, privileged and honoured to be in this seat. HBL is the best banking brand in Pakistan and the State Bank of Pakistan (SBP) has categorised HBL as a DSIB (Domestically Systemically Important Bank). When I considered the opportunity to head the largest bank in Pakistan, two things motivated me. Firstly, I felt I could leverage my 18 years’ experience abroad to take HBL to the next level and secondly, that I could contribute to the Risk & Control agenda. The world has moved on in terms of new compliance standards and transaction monitoring and I believe that HBL should take the lead to ensure Pakistan meets those world standards.

A: How far or close are Pakistani banks to meeting international compliance guidelines?
MA: Globally, over the last few years, the bar has been raised in terms of compliance standards and the requirements under KYC (Know Your Customer). This means implementing biometric verification, making sure the documentation is correct and determining whether we are dealing with politically-exposed or high-risk clients (if so, they require a different level of diligence). In Pakistan, the industry has started moving in this direction but it will be a journey because of two things. The first has to do with ensuring new clients comply with KYC standards. The second and the most difficult is dealing with legacy portfolios – those clients with whom we have been dealing for 10, 20 years or more. Streamlining them and ensuring they are in compliance with the new requirements will take time. This has been the case in most countries; first you ensure that new clients are in compliance and then it is a journey that can take up to three years to remedy the existing portfolios.

A: Does Pakistan present a particular set of challenges in ensuring this compliance?
MA: The first part is to explain the ‘why and what’ and make customers understand that ultimately, the need for biometric verification and other documentation is for their own protection. This requires education and a shift in mindset. The second part is the ‘how’ and here, technology is crucial as we are dealing with millions of legacy customers. New or recent customers are not the problem because their on-boarding is already digitised. Legacy customers are the challenge. Rather than try and locate the original records they submitted, it may be easier to ask them to provide the documentation again and then digitise them to ensure this exercise is not repeated. At the moment, we are dependent on our branch and relationship managers to ensure the documentation is kept in the right place. Once the records are digitised, they go into a database and the human element is out of the picture.

A: To what extent will you have to retrain your staff to accomplish this?
MA: This is going to be a big part of the transformation. Both the content and technology part of the training will be a challenge for the industry. In terms of content, we need to ensure that there is no drip-feed; that we ask customers for all the documents required in one go, rather than going back after two days to ask for further documentation. This is an important component of the training for our branch and relationship managers. As far as technology is concerned, HBL has 1,700 branches, 2,000 plus ATM networks and to expect every branch, relationship and operations manager to be technology-savvy is a big ask. To digitise the process, we have to train people on how to input the documentation and transmit it to our processing centre. We have a staff of 20,000 plus employees and you cannot expect every one of them to have the same level of consistency and understanding of both the content and technology without training. This is going to be one of the biggest challenges for HBL because of our size and the complexity of what we are dealing with; I would say this goes for the entire industry.

A: Apart from the KYC aspect, what other factors impinge on the Risk & Control agenda?
MA: KYC is the overarching aspect and encompasses issues such as money laundering and proscribed entities. Once you have ticked the boxes, you have done the due diligence required from a KYC perspective. Then it becomes a matter of ongoing monitoring of transactions to detect anomalies or deviations from normal activities. All this was being done before, what has changed is that the bar has been raised to such a level in terms of the consequences, that it becomes a question of the reputation of the bank, the industry and ultimately of the country. The stakes are very high that we get this right.

A: What else needs to be done to achieve a quantum leap in overall standards and practices?
MA: Firstly, the industry has to think through the new capital liquidity standards as set under Basel III and IFRS 9. Banks will have to assess the impact these standards will have on their own capital liquidity. This is a regulatory discussion that must be done comprehensively. Secondly, it is technology. We have 12 million customers and every year we bring on board close to one million. However, Pakistan’s population consists of 220 to 225 million people and as the largest bank in the country, I consider them to be my client base. The Government and SBP want to draw the unbanked population into the net. How do we expedite this? We already have 1,700 branches; how many more can I open? This is where the push towards technology comes in. We have launched Konnect, which is a branchless banking solution and we have secured the compliance side through real-time screening. Equally important is what we are doing through mobile wallets and apps. We are the first bank to have made it possible to disburse loans worth Rs 50,000 to 500,000 through our app, and if the customer checks out, we disburse the amount within two hours. All this is ultimately about big data, data analytics and AI. A huge database flows through our bank and using it properly depends on technology. We have signed up with an AI firm in Singapore to come and train our people in Pakistan. I am very clear that we have to start thinking of ourselves as a technology company with a banking licence; this is where the future of the industry is. The flip side is that the more banks digitise, the more they will have to invest in building the right firewalls to prevent cyber attacks. Cyber security is becoming critical. In Pakistan, this discussion only began recently, whereas in other countries, financial institutions have spent a lot of time and money to ensure their firewalls are strong enough to protect client data and avoid data hackers.

A: Will most banks be willing to make such significant investments?
MA: This is a wake-up call. There can be no complacency. Even J.P. Morgan had their systems hacked. You have to be on your toes and be prepared. The challenge will be for the smaller banks because this type of investment requires a serious amount of capital. You could argue that the cost of delivering compliance in terms of international standards is a project because the technology and the consultants required to achieve the job are a one-off cost. Yet, even so, the new compliance standards have structurally changed the cost of doing business and driven it higher. Similarly, on the technology side, whether it is the front or the back-end, more investments will have to be made and this will become more and more difficult for the smaller banks. My sense is that both the regulatory regime and the new world order in terms of technology may move the industry in Pakistan towards further consolidation.

A: One of the criticisms of the banking sector in Pakistan is that it relies too heavily on government lending rather than focus on the private sector, SMEs and agriculture. What is your view?
MA: The demand for government loans has been very high, especially in terms of the energy sector and the circular debt. Added to this, there is a good risk spread from the Government and therefore from a profitability perspective, banks feel it is a safer option and from a risk-reward equation, it makes a lot of sense. Having said this, the banking industry, including HBL, should be doing more for the SME and agriculture sectors and we need to collectively work with the Government to develop capital markets. In my view, having returned after 18 years, the capital markets in Pakistan have regressed. For example, when I left in 2001, WAPDA, rather than approach the banks for a loan, would go to the capital markets and offer institutional and retail bonds. We need to move in that direction again and HBL is going to play a role in furthering the development of capital markets. In terms of SME and agriculture, my view is that we have to turn this issue around. Yes, we have to meet the targets set by SBP but we should not be doing this out of compulsion. We need to develop a sustainable model whereby the banks are incentivised to provide that lending. There are issues of risk appetite and collateral but the banking industry can work on these areas. We are very proud to have received the Best Agriculture Bank Award from the Institute of Bankers Pakistan. So we have already taken the lead but can we do more – absolutely. Because when banks do not step up to the plate, the middlemen step in. Banks have a big role to play when it comes to the disintermediation of the middlemen. If the banks step in, it will be a win-win situation. Farmers will have access to finance at lower rates and we will have access to businesses that are profitable. We need to work with the Government to create a more enabling environment. We also need to step up in terms of SMEs; in every country in the world, including Pakistan, they are the engine of economic growth. When we speak of job creation, it mostly comes from this sector. We need to put in place the enabling infrastructure. From an HBL perspective, I am determined that we will grow in both sectors significantly.

A: The SBP has won praise in Pakistan and internationally for its progressive approach, but do you think it could do more in this regard?
MA: I have interacted with regulators from 14 different countries and I can say SBP is one of the more progressive sector banks. But it has to work at both ends. When I left in 2001,

Dr Ishrat Husain was Governor, SBP, and he had started a fantastic consultative process by reaching out to the banks and the captains of industry to work on a partnership basis. So can the SBP move more towards directed lending guidelines by setting targets? Yes it can, but for me it is about sustainability; as a bank, I should have an in-built incentive to do something because it is the right thing for the bank and for our customers. As an industry, we have to be more proactive in approaching SBP with our ideas and opinions and SBP should involve us in their thinking process. This kind of consultative approach should be more entrenched.

A: To what extent will the changes you have spoken about be impacted by the economic situation?
MA: The issue in Pakistan are the twin deficits on the fiscal and the current account side. There is no lack of policy prescriptions; when I was here, the policy prescriptions were almost the same as those that are coming up now. The Government is saying all the right things but time will tell how they will be executed and implemented. There are going to be tough political choices and decisions to be made but as a country, we need to make those structural shifts and move into a more sustainable situation, otherwise we will be going to the IMF every four to five years. As for whether the banking industry will be affected by the current situation, the answer is yes – because of the currency adjustments and more importantly, the fact that the policy rate (interest rate), which was 7.5% is now 8.5% with a certainty of going up further. As interest rates rise, they will have an impact on deposits and loans will have to be repriced. Added to this, a lot will depend on the IMF negotiations. If the Government has to go for further commercial borrowing, this will impact our focus on the real sectors, by which I mean SME, agriculture and corporate activity. Furthermore, there are different views regarding GDP growth; there is an expectation that it will decrease from the current 5.5% to 4.5 or even 3.5%, causing a slowdown – and again this will impact the industry.

A: So, choppy waters ahead?
MA: What will differentiate the men from the boys is how we manage this change and transformation programme. If we manage it proactively and manage it well, the industry will continue to grow.

Muhammad Aurangzeb was in conversation with Mariam Ali Baig.

For feedback: aurora@dawn.com