Policy Considerations before Bank

Privatization – Country Experience

Dr. Ishrat Husain

Governor
State Bank of Pakistan

Presentation made at the World Bank, International Monetary Fund and Brookings Institution Conference on
“The Role of State-Owned Financial Institutions: Policy and Practice” held at Washington D.C., on April 27, 2004.
 Outline
• Background
• Rationale
• Modalities
• Pre-Privatization Activities
• Case Studies
Privatization of Banking Sector in Pakistan

Background

Financial sector significantly altered in early 1970s with

nationalization of domestic banks under the Banks
Nationalization Act 1974.

The Pakistan Banking Council was set up to act as

holding company of nationalized commercial banks and
to exercise supervisory control over them.
Privatization of Banking Sector in Pakistan
By end of 1980s, the pre dominance of public sector in
banking and non bank financial institutions together with
instruments of direct monetary control was contributing
to financial repression, financial sector inefficiency,
crowding out of private sector and deteriorating quality
of
assets.

SBP’s role as a central bank had been considerably

weakened due to the presence of Pakistan Banking
Council. Duplication of supervisory role was diluting
SBP’s enforcement of its regulations over nationalized
 Pre-privatization structure of Banking
Sector (1990)
Banks No. Assets Deposits Equity
Amount Share Amount Share Amount Share
(Rs. (%) (Rs. (%) Rs. (%)
Billions) Billions) Billions)

State- 7 392.3 92.15 329.7 93 14.9 85.6

owned
Private - - - - - -

Foreign 17 33.4 7.84 24.9 7 2.5 14.4

Total 24 425.6 100 354.6 100 17.4 100

Source: Financial Sector Assessment 1990-2000, State Bank of Pakistan

Privatization of Banking Sector in Pakistan
At the onset of the 90s, the Banking Sector in Pakistan
was dominated by the public sector banks which were
characterized by
• High Intermediation Costs
• Over-staffing and Over-branching
• Huge portfolio of Non performing Loans
• Poor Customer Services
• Undercapitalized
• Poorly Managed / Narrow Product Range
• Averse to Lending to SMEs/Housing & Other Segments
• Undue Interference in Lending, Loan Recovery & Personnel
 Rationale for Privatization in Pakistan
Privatization process initiated in the early 1990s as part of
economic reforms programme

Establishment of Privatization Commission in 1991 for

disposing state owned enterprises
Mission statement of Privatization Commission
“Privatization is envisaged to foster competition, ensuring
greater capital investment, competitiveness and
modernisation, resulting in enhancement of employment
and provision of improved quality of products and services
to the consumers and reduction in the fiscal burden”.

Privatization Policy announced in 1998

Rationale for Privatization in Pakistan
1. Reduction in fiscal deficit
Fiscal deficit reached a high of 8.5 percent of GDP in
1987-88. Loss making making public sector
enterprises were a burden on the national exchequer.
2. Increase in the efficiency levels
Efficiency levels of public sector enterprises were
low. Production costs of public enterprises were high
as a result of political interference.
3. To foster competition
State owned units when sold to different parties
would result in healthy competition in different
sectors of the economy.
Rationale for Privatization in Pakistan

4. Broad basing of equity capital

Privatization would result in strengthening and
deepening of capital market when some percentage of
shares of public enterprises are sold to the public
through stock exchange.
5. Releasing resources for physical and social
infrastructure
More funds available for development projects.
Privatization of loss making enterprises would give
govt. more fiscal space
 Modes of Privatization adopted in Pakistan

The Privatization Policy of 1998 outlined the

following modes of privatization:
• Total disinvestment through competitive bidding
• Partial disinvestment with management control
• Partial disinvestment without management
control
• Sales/ Lease of assets and property
 The Privatization Process
1. Identification

2. Hiring of a Financial Advisor

3. Due Diligence

4. Enacting Regulatory and Sectoral Reforms

5. Valuation of Property

6. Pre-Bid and Bid Process

7. Post-Bid Matters
 Steps taken for preparing banks for
privatization
1. Amendment in Banks (Nationalization) Act 1974 in
1990.
2. 11,101 workers out of 39,277 were relieved from HBL,
NBP and UBL.
3. 1646 branches of NCBs allowed to be closed.
4. Rs. 46.6 billion injected as equity to recapitalize the
banks.
5. NPLs worth Rs. 47.4 billion transferred to CIRC1 at
discount for disposal.
6. Tax refund bonds issued to NCBs amounting to Rs.
6.5 billion issued
1
Corporate and Industrial Restructuring Corporation established in 2000 for acquisition of
NPLs.
 Steps taken for preparing banks for
privatization
7. Professional management installed in HBL, NBP and
UBL.
8. Boards of Directors reconstituted with private sector
individuals of integrity and eminence.
9. Promulgation of Privatization Ordinance in 2000
10. Introduction of incentive scheme for loan defaulters
11. Committee for Revival of Sick Units
 Role of State Bank in Privatization
1. Analysis of issues, design of restructuring plan of
nationalized commercial banks (NCBs), monitoring
and implementation follow up.
2. Voluntary Separation Schemes for excess labor
designed and implemented with the financial
assistance of the World Bank.
3. Approval of the Chief Executives and Boards of
Directors of newly privatized banks according to the
‘Fit and Proper’ test
 Role of State Bank in Privatization
4. Meaningful input on documentation viz-a-viz
Advertisement, Statement of Qualification (SOQ)
and Agreement for sale of shares and transfer of
management.
5. Screening and evaluation of the Strategic Investors
for clearance of purchase of 5% or more shares of
NCBs in order to ensure quality and competence of
buyer.
6. Resolution of the issues raised by the strategic
investors during the process of privatization.
7. Evaluation of bids
 Banks privatized so far
1. Muslim Commercial Bank Limited
26 % shares were sold to the National Group in April 1991 for
Rs. 838.8 million. Another 25 % shares were offered for
subscription to the public in February 1992. Remaining shares
have been divested in January, 2001, November, 2001 and
October, 2002 for proceeds of Rs.1,287.2 million.

2. Allied Bank of Pakistan Limited

26 % shares sold to Allied Management Group (AMG) –
representing employees of ABL, in 1991. Another 25 % sold in
1993, resulting in transfer of ownership from government to
AMG.

3. Bankers Equity Limited

In June 1996, 51 % shares were sold to LTV Consortium for
Rs. 618.73 million
 Banks privatized so far
4. Bank Alfalah Limited
Highest bid of Rs. 1.64 billion received for sale of 70 % shares
of Habib Credit & Exchange Bank Limited (presently Bank
Alfalah) in June 1997. 2% shares were meant for the employees
28% shares sold in block for Rs.1,226.0 million. The shares not
taken up by the employees were also sold. Sale Purchase
Agreement was signed on 13th December, 2002

5. United Bank Limited

51% shares sold in October, 2002. Payment of US$ 176,907,858
and Rs.1,852,500,000 received

6. Habib Bank Limited

Highest bid of Rs.22.409 billion received from Aga Khan Fund
for Economic Development, for sale of 51% shares on 29th
December, 2003. Transfer to the new owners took place on
February 26, 2004.
 Banks privatized so far
7. National Bank of Pakistan
23.2% shares have been divested through IPO/POs in
November, 2001, February, 2002 (Rs.373.0 million) November,
2002 (Rs.782.0 million), November, 2003 (Rs.604.0 million). 
Privatization of Banking Sector in Pakistan
Units privatized to date
(Rupees in Billion)
1991 to Jun Jul 2002 to Jul 2003 to To Date
2002 Jun 2003 Jan15, 2004

Sector No. Amount No. Amount No. Amount No. Amount

Banking 4 5.6 2 12.9 1 22.4 7 41.0

US $
710
million
Source: Privatisation Commission
 Post-privatization Structure of Banking
Sector (March 2004)
Banks No. Assets Deposits Equity
Amount Share Amount Share Amount Share
(Rs. (%) (Rs. (%) (Rs. (%)
Billions) Billions) Billions)
State- 4 518.8 18.6 379.3 20.1 22.5 17.2
owned1
Private 20 1840.3 66.0 1292.3 68.5 92.8 70.9

Foreign 13 278.4 10.0 198.0 10.5 26.7 20.4

Specialize 3 149.8 5.4 16.1 0.9 -11.1 -8.5
d banks2
Total 40 2787.2 100 1885.6 100 130.9 100

Source: Banking Supervision Department, State Bank of Pakistan

1
Three small new banks were set up in the public sector during the 90s. These included the First Women Bank, set up

to provide credit to women entrepreneurs; and two provincial banks; the Bank of Punjab and the Bank of Khyber.
2
These include: Zari Tarqiati Bank Ltd, Industrial Development Bank of Pakistan and Punjab Provincial Co-
Privatization of Banking Sector in Pakistan

Case Studies

1. Muslim Commercial Bank

2. Allied Bank Limited

 Muslim Commercial Bank
First bank in the public sector to be privatized

On 6th April 1991, 26 % shares of MCB were sold to

National Group at a price of Rs. 56 per share, for a total
amount of Rs. 2.4 billion.

As part of the Sale Agreement, a further 25 % of shares

were offered for subscription to the public on 19th
February 1992.
Further shares were sold in January, 2001, November,
2001 and October, 2002 for proceeds of Rs.1.3 billion.

Upon completion of disinvestments of 51 % shares, the

application of Banks Nationalization Act 1974 ceased on
MCB
 Muslim Commercial Bank
Financial Indicators (1994-2003)

30 30
25 25
20 20
15 15
%

%
10 10
5 5
0 0
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003
Assets (% of assets of NCBs) Deposits (% of deposits of NCBs)

30
25
20
15
%

10
5
0
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003
Advances (% of advances of NCBs)

Source: Financial Sector Assessment 2001-02, State Bank of Pakistan

Banking Supervision Department, State Bank of Pakistan
 Muslim Commercial Bank
Non Performing Loans as % of Total Loans
(1993-2003)

20

15

10
%

0
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003
Source: Financial Sector Assessment 1990-2000, State Bank of Pakistan
Banking Supervision Department, State Bank of Pakistan
 Muslim Commercial Bank
Return on Assets (1993-2003)

1.0
0.8
0.6
%

0.4
0.2
0.0
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003
Source: Financial Sector Assessment 1990-2000, State Bank of Pakistan
Banking Supervision Department, State Bank of Pakistan
 Muslim Commercial Bank
Impact Analysis of Privatization

• Assets as a proportion of total assets of the nationalized

banks grew from 18 percent in 1994 to over 28 percent
by 2003 – an increase of 10 percentage points.
• Deposits as a proportion of total deposits of the
nationalized banks increased from 17.6 percent in 1994
to 26.5 percent in 2003.
• Advances as a percentage of total advances of
nationalized banks were 17.7 percent in 1990 which
had grown to 26.7 percent by 2003.
• NPLs as percentage of total loans varied between a low
of 11 percent in 1997 to a high of 18.6 percent in 1993.
 Allied Bank Limited
Second bank to be privatized in the public sector

On 9th September 1991, 26 % shares were sold to the

Allied Management Group, which represented the
employees of ABL at a price of Rs. 70 per share

On 23rd August 1993, another 25 % shares were sold to

AMG at price of Rs. 70 per share

This resulted in transfer of ownership from Government

of Pakistan to AMG
 Allied Bank Limited
• In 1999, it transpired that one of ABL’s major
defaulters had purchased about 35-40 % of ABL
shares from employees.

• In July 1999, SBP imposed restriction on transfer of

shares from employees to non-employees except on
prior approval from SBP.

• On August 3, 2001, the SBP removed the Chairman

and three Directors on the Board of ABL as they
were found to be working against the interests of
ABL and its depositors and appointed new Board.
 Allied Bank Limited

ABL was excluded from list of privatization and the

strategic sale of the remaining 49 % govt. share was
transferred to the SBP.

In February 2004, 6 parties were pre qualified for bidding

 Allied Bank Limited
Financial Indicators (1995-2003)

14 20
12
10 15
  8
%

10

%
  6
4 5
2
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 1995 1996 1997 1998 1999 2000 2001 2002 2003

Assets (% of assets of NCBs) Deposits (% of deposits of NCBs)

20

15

10
%

0
1995 1996 1997 1998 1999 2000 2001 2002 2003

Advances (% of advances of NCBs)

Source: Financial Sector Assessment 2001-02, State Bank of Pakistan

Banking Supervision Department, State Bank of Pakistan
 Allied Bank Limited
Non performing Loans as % of Total Loans
(1993-2003)

50
40
30
%

20
10
0
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003
Source: Financial Sector Assessment 1990-2000, State Bank of Pakistan
Banking Supervision Department, State Bank of Pakistan
 Allied Bank Limited
Return on Assets (1993-2003)

1.0

0.0 1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003
-1.0

-2.0
%

-3.0

-4.0

-5.0

Source: Financial Sector Assessment 1990-2000, State Bank of Pakistan

Banking Supervision Department, State Bank of Pakistan
 Allied Bank Limited
Impact analysis of privatization

• Assets as a percentage of total assets of nationalized

banks increased from 9.6 percent in 1995 to 12 percent
by 2002.
• Deposits as a proportion of total deposits of
nationalized banks grew from 9.8 percent in 1995 to
14.3 percent in 2003.
• Advances as percentage of total advances of
nationalized banks peaked at 15.5 percent in 1999 but
declined to 11.2 percent by 2003.
• NPLs as a proportion of total loans jumped from 16.1
percent in 1993 to 43.8 percent by 2003
 Lessons Learnt
The Allied Bank was not transferred to a strategic
investor but employees. This approach proved to be even
worse than public sector ownership. Efforts are underway
to transfer the majority share to a private sector financial
institution through competitive bidding process.

In contrast, MCB was sold to a group of private

strategic investors who have turned around the bank and
improved all indicators including improved service to
customers, technology upgradation and cost efficiency.
Thank You