Syed Ali Raza, Chairman & President, National Bank of Pakistan speaks about the global financial crisis and Pakistan’s prospects under a new financial world order.

AURORA: Why has the National Bank of Pakistan (NBP) been the only one among the ‘big 5’ banks to have shied away from going for an aggressive change of image or from introducing consumer banking products, such as its own credit card?
SYED ALI RAZA: There are two parts to your question. One, you imply that maybe our branches are in some sense less glamorous looking. It is quite the opposite. The perception of any government-owned institution is unfortunately not very positive, yet our results demonstrate that we have been the most successful bank in Pakistan by a decent margin over the last six or seven years. Business today only comes to an institution if its service is good, otherwise there is no obligation. All the laws that protected government-owned institutions no longer apply; government-owned organisations can now keep their funds with any institution they want.

A: But they still tend to keep their accounts with NBP?
SAR: That is not the case; they go where they get the best deal. This is a completely open market; it’s the survival of the fittest and the entity that is able to deliver the better service is the entity that is going to get the larger business. If you visit our branches, say the one on I.I. Chundrigar Road, and compare it to a Habib Bank or a UBL branch, there will not be much difference. But the negative perception which comes from being a government-owned bank is something we cannot do anything about. Even if our facelift enables us to look like a European bank, that perception will not change. And yet, what a paradox it is, that the whole edifice on which the so-called free market was based has collapsed, and now the economic model that is being pursued is the private public partnership model, which is essentially what the National Bank of Pakistan is. So looking to the future, the perception of being a government-owned institution may not be viewed as negatively as it has been for all these years. Now let me address your other issue regarding why we are not into the consumer finance business and why we don’t have the credit card. This is not an accident; this is by design and there are reasons for this. A loan is a loan, and you can brand a loan in any way you want. Customers are often given the impression that these loans are different products, whereas in fact, it is the same product. One has a fixed rate, one a variable rate, another a rate linked to a reference rate. They are all branded differently, but like all those (mobile) phone packages, they are all the same. The question is, which is the biggest consumer bank in the country? It is the National Bank of Pakistan. We have the highest amount of consumer loans, and we also have the safest consumer portfolio of any bank in this country, because most of our consumer loans are parked in what we call the advance salary category. We have created a product where we give our customers a three or five years’ advance on their salary. Their salary comes into the bank and the principal and the interest instalment are deducted, making the risk much more manageable because you are dealing with someone with a source of income. This is a very successful product and in terms of volume this single product is bigger than the portfolios of all the other large banks. With such a successful product, why should I take risks by going into auto or other personal loans?

A: And the credit card?
SAR: The reason why we have not issued a credit card is because we are putting into place a new core banking system and until we did that we did not feel that by not issuing a credit card we were losing out on a great or very profitable product. Hopefully, by the first quarter of next year we will launch a credit card; we have signed the contract and the implementation process of this new system has started. So many institutions have had huge amounts of negative press because their cards don’t function properly due to the fact that they don’t have the right interface.

A: What is the image that NPB wants to project?
SAR: The image we want to project is of a safe, solid, institution you can trust. We do not want to be known as a high-flying institution that is very aggressive or ultra-modern in the way it does its business. The reason why is that until seven or eight years ago, when the banking sector was reformed, this bank was principally doing the government’s treasury business and lending to the public sector; it was doing very little commercial business. It would have been too fast a transition to aim for a new image that was different to the brand image we had developed.

A: From where does a bank like NBP grow its business?
SAR: Everywhere in the world 90% of the new accounts are transferred from other institutions and 10% is the growth that comes from new business, and it is pretty much the same for Pakistan.

A: So banks survive thanks to that 90% churning around from bank to bank?
SAR: The balance sheet will tell you which banks are doing a better job. But you are absolutely correct, yet it’s the same for every business. The only difference is that there is more competition in banking compared to most other business. There are 40 banks in Pakistan, whereas there are only three or four firms offering mobile phone services. Anywhere in the world banking is the most competitive sector and the institutions that survive are those that deliver the better service, have the greater customer loyalty and are able to maintain and retain relationships, and the 90% transfer I was talking about, maybe in our case that ratio is 50%.

A: Relative to the population, isn’t there a large proportion of customers who should have bank accounts, but do not?
SAR: Yes. We have about 27 million account holders in the banking system; however, if I have an account in two banks those accounts become part of the 27 million. If you are talking about individuals holding accounts, I think it is about 16 million out of a population of 160 million, which means that only 10% of the people have bank accounts. The objective of the government, the central bank and the commercial banks is to take this to 25 or 30% over the next 10 years.

A: Can it be done?
SAR: It can. As banks penetrate different areas, as they compete with one another, as access to banking spreads and as people start understanding the value of a debit card or the benefit of a credit card, there will be more attraction to enter the banking system. The last six or seven years have seen a growth of seven or eight percent in the number of account holders and I think that growth will continue.

A: What is your view of the current global financial crisis?
SAR: The world has changed and we have no idea what it will look like financially over the next 12 to 18 months in terms of trade, investment and capital flows, because a number of the essential foundations that were driving economic growth and the flow of funds and capital have been shattered. The world will have to adjust to a new reality and there are no ideal solutions. All the governments in the West, especially the US, have been running deficits for a long time, because they are consumer-oriented economies and now that they have to fork out trillions of dollars just to keep their banking systems alive, it is a question of how and where they going to raise all that money.

A: Will one of the silver linings of this crisis be the return to stricter regulation?
SAR: The message of the last six to seven weeks is that the regulators believed in the sanity of the free market, that the free market would determine the winners and losers, as a result the huge number of financial instruments created by these financial institutions were not, in any sense, being regulated by the central banks. It is the collapse of these financially engineered instruments that has created the chaos and the loss of confidence. Whether it’s a good thing or a bad thing I don’t know, but what is absolutely true is that investment banks are finished and the process of capital raising through investment banks is over. This will have a monumental impact on world trade and investment, because investment banks globally raised about 50% of the world’s capital.

A: Will this crisis have an impact on Pakistan?
SAR: No. Here the banking system is solvent. The banking system is very conservative, all our loans are collaterised; our reserve requirements are about two and a half times as high as the requirements in most other countries. We haven’t gone into any esoteric products. Two months ago, it could have been said that this is a pretty plain vanilla banking system with a sense of sneer, but now it would be said with a sense of envy. Countries that have basic banking systems are now rated more highly because they carry less risk. Similarly, until two weeks ago, the fact that we are not an export dependant country was counted as one of our weaknesses. Today, countries that are very dependant on exports are going to take the most heat. Another thing is that Pakistan has no exposure to the sub-prime market. So we are pretty insulated from what has happened. Of course, where we, and every other country, will be affected is in our ability to sell to Europe and America because they will be purchasing much less, but we will be hurt much less than those countries that were selling a much larger volume.

A: How would you explain the sudden panic that seems to have hit the banks last week in terms of deposit withdrawals?
SAR: I would not categorise it as panic, because had there been panic, we would have seen evidence of that in the banking system and there is no evidence of panic. There is evidence of tightness and there is evidence of concern. Like in any country, you have rumour mongers who want to create perceptions that are not correct and people are influenced by them, while the media at times attributes statements to people who are not experts on the subject at all.

A: Surely the fact that we are so low on foreign currency reserves must have an impact on the banking system?
SAR: There is a liquidity constraint that the banking system is facing. Pakistan is a country that has seen difficult times before, but this time everyone realises that Pakistan is a very important country from a strategic point of view. It is also a country which has a lot of potential. The President (of Pakistan) has taken an excellent initiative in organising the Friends of Pakistan Conference. We need 12 to 18 months breathing space. Pakistan is a country that has the resilience and the ability to rebound very quickly, and because of the financial tsunami of the last few weeks, when we get this breathing space, we will be able to actually leapfrog a number of other countries in the next 18 months; countries that are better off than us now in terms of per capita income, because their problems are going to be much more.

A: On what do you base this optimism?
SAR: We have fantastic human resources (although we need to spend more on education) and huge national resources. We can capitalise on our agricultural resources; our yields per acre are half that of India, and that is a negative thing, but the upside is that it shows that with the same climate and the same soil we can double the yield and become a major exporter of agricultural products. We have a lot of minerals; coal, iron, copper. And then our strategic location; Central Asia can only export through Pakistan, whether it is trade or energy, because the other land routes are more expensive. We are in the eye of this entire energy corridor.

A: Do you think we are capitalising on these assets?
SAR: We are. One of the problems is that we tend to focus on the negative and although there are good things happening in this country every day, we don’t hear a single thing about them. There are difficulties but we must have a positive frame of mind, because unlike many countries which don’t have the resources and which are landlocked, we have a lot going for us.

A: Are you optimistic that in 18 month’s time Pakistan will be back on track?
SAR: Absolutely, and when I say optimistic I am basing this on ground realities. For the reasons that I have given and the fact that we have a functional democratic system, some of the issues that we faced before and which were impeding our recognition, will be taken care of. Yes, there is a law and order problem but the steps the government is taking to resolve that seem to be working, and they (the government) seem to feel that in six months’ time they will be able to get this issue under control. We have a young population and we can realise our demographic dividend if we invest in education much more. Pakistanis are second to none in terms of initiative, entrepreneurship and ability. The world is very different now. We have to live with very different realities and in this new world, where Pakistan has an un-leveraged economy, and one that does not depends on exports for its survival, I think we will come up very well. I am extremely optimistic.

Interview conducted by Mariam Ali Baig on October 13, 2008. For feedback: aurora@dawn.com