MI S S I O N S TAT EM E NT A N ALY S I S 1

The mission statement of Muslim Commercial Bank is extremely

concise and does not cover most of the components that
should be included in a mission statement. Their focus is
too broad with no emphasis given on important details which
might provide valuable guidelines and directions to its
employees in the long term.

Customers

There is no mention of the customers in the mission statement

and no recognition of how valuable customer satisfaction is
f o r t h e c o m p a n y, w h i c h s h o w s t h e l a c k o f i m p o r t a n c e g i v e n
to the customers of the bank. This fact is very typical of
local banks as compared to foreign banks operating in
Pakistan.

Products & services

The mission statement does mention that the bank intends to

provide high quality financial services but fails to state the
different types of financial products and services it intends
to provide its customers and how its products are
differentiated from its competitors.

Markets

1
Managerial Policy Report, MBA-IV report, submitted to Dr. Mahnaz Fatima (page 1-2)

1
The mission statement reveals that the bank is providing its
services in only Pakistan even though it is also operating in
other countries including Sri Lanka, Bangladesh, Bahrain,
China and United Kingdom. This not only provides incorrect
information to the readers but also shows how narrowly
focused the company really is.

Te c h n o l o g y

There is no mention of the technological innovations being

used by the company to improve and modify its products in
the mission statement even though MCB is the only bank in
Pakistan which is currently using a televerification system
to avoid the forgery of its travellers cheques.

Concern for survival, growth & profitability: In the mission

statement the company emphasises on profitable operations
rather than growth which shows that the company’s main
f o c u s i s o n i m p r o v i n g p r o f i t a b i l i t y.

Philosophy

The major philosophy of the company that can be deduced from

the mission statement is the focus on improving profitability
by providing high quality financial services to its customers.

Self concept

The company has failed to mention its competitive advantage in

the mission statement which the employees could capitalise
on in order to provide better solutions to the needs and
problems faced by the customers.

2
Concern for public image

There is no mention of the environmentally friendly activities

that the company is undertaking to enhance its image in the
public.

Concern for employees

The mission statement does mention that the company intends

to be the best place to work but it does not emphasise the
rights and privileges of the employees who will be working
for the bank.

“To beco me the preferred

pro vider of q uali ty

fina n ci al servi ces in the

co u n tr y w ith profita bili ty

an d resp on sibi lity

a nd to be the

best place to wo r k”

3
 PART I
HI S TO RY OF T H E B AN K I N G S E C TO R 1
1940s
Prior to partition in 1947, branches of British banks dominated
banking in Pakistan. The first domestic banking institutions
emerged in the 1940s, immediately preceding or shortly after
Pakistan’s independence from Britain. These institutions include
Australasia Bank (today: Allied Bank Ltd. or ABL), Habib Bank
(HBL), Muslim Commercial Bank (MCB), and the National Bank of
Pakistan (NBP). Except for the NBP which was wholly government-
owned, prominent merchant families established the other three
banks.

1948
The SBP or State Bank of Pakistan (the central bank) was formed
after Partition. It assumed the supervisory and monetary policy
powers of the State Bank of India.

1955

1
Banking Sector Report, June 1998 by ABN AMRO N.V. (pages 2-3) & ING BARINGS, Pakistan
Research, June 1997 (pages 37-38)

4
The Government issued the State Bank Ordinance, explaining the
functions of the state bank in the emerging Pakistan.

1959
United Bank Limited (UBL) formed.

1960/70s
1960-65: During the second five-year plan (1960-65), the SBP
opened six new offices. The number of other bank branches
increased from 430 to 1,591 over the period. Total deposits
increased from Rs2,943mn to Rs6,883mn, while total advances
increased to
Rs5,759mn from Rs1,458mn. During the period, comprehensive
banking laws were formulated.

1965-70: During the third five year plan (1965-70), the total number
of bank branches increased to 3,133, with a 91% increase in deposits
and a 64% growth in advances.

The emergence of a number of specialised development finance

institutions (DFIs) such as Industrial Development Bank of Pakistan
(IDBP) and the Agricultural Development Bank (ADB). These DFIs
were either controlled directly by the state or through the SBP, and
were intended to concentrate on specific priority sector lending.

1974
The government of Zulfiqar Ali Bhutto nationalized all domestic
commercial banks. The Pakistan Banking Council (PBC) was
established, which assumed the role of a bank holding company but
with limited supervisory powers. However, PBC was dissolved
in1997, leaving the SBP as the sole regulatory authority for banks
and financial institutions in Pakistan (leasing companies and

5
modarabas are now regulated by the Corporate Law Authority).
Nationalization of the banking sector led to significant government
interference and resulted in directed lending to pet projects. The
branch network of the NCBs also proliferated in an effort to provide
banking services to all regions/territories of the country, often with
disregard to the viability or feasibility of such expansions.

1991-92
1991: After the opening up of the economy, the Sharif Government
introduced the second set of banking sector reforms.
Deregulation of the financial sector and capital markets led to
mushrooming growth of banking companies in the private sector.
Several big industrial groups set up their own banks, which to date
remain relatively small compared to the NCBs and other larger
foreign banks.

1991: MCB privatized by Sharif Government.

1991: Allied Bank Limited was privatized. Employees of the bank

took it over matching the highest bid received by the Privatization
Commission.

1992: Nawaz Sharif introduced a yellow cab scheme that took

Rs10bn from the local banking sector.

1995
The SBP canceled the privatization of United Bank, which was
bought by a Saudi based group.

1996
The Privatization Commission called for bids for the privatization
of HBL.

6
1996
Financial sector reforms were introduced by the caretaker
government of Meraj Khalid.

1997
Nawaz Sharif took steps to implement banking sector reforms.

ST R U CT U R E O F T HE BA N KI NG S E CTO R I N PA K I STAN 1

The financial sector in Pakistan is comprised of Scheduled

1
Banking Sector Report, June 1998 by ABN AMRO N.V. (page 1)

7
Commercial Banks, which include nationalized, foreign and private
banks; and Non-Banking Financial Institutions (NBFIs) which
include Development Finance Institutions (DFIs), Investment Banks,
leasing companies, modarabas, and housing finance companies.

Scheduled Banks and NBFIs (excluding modarabas and leasing

companies) are both regulated by State Bank of Pakistan’s (SBP)
Prudential Regulations although through different wings and are
required to meet different regulatory requirements such as capital
and liquidity reserve requirements.

Commercial banks engage in activities that mostly cater to short

term working capital requirements while NBFIs cater to medium and
long-term financing needs. Therefore NBFIs are barred from
engaging in commercial banking activities. However in September
’97 the SBP allowed commercial bank to undertake long term project
lending. Among the scheduled banks, only Pakistani commercial
banks are listed.

Structure of Financial Sector in Pakistan

Scheduled Banks NBFIs

Commercial banks Modarabas
Specialised banks Leasing Companies
DFIs
Investment Banks
Housing Finance Cos’

8
 Specialised Commercial
Banks Banks

Foreign Banks Domestic Banks

B A NK I N G S E C T O R R EF O RM S I N P AK IS T A N 1

Early Banking Sector Reforms

The first Bhutto government introduced a comprehensive set of
restructuring measures in 1971. These reforms were aimed at:
• Widening the supervisory powers of the SBP;
• Increasing capital adequacy standards;
• Introducing credit ceilings;
• Establishing an institution that would monitor the credit
requirements of both the public and private sectors.

These reforms were ineffective and short lived since even before
they were fully implemented, the then Bhutto Government issued
the 1974 Nationalisation Act. This act was implemented to widen
the dispersion of credit and increase its availability to the
agricultural sector.

1
Banking Sector Report, June 1998 by ABN AMRO N.V. (pages 4, 5 & 6)
& ING BARINGS, Pakistan Research, June 1997 (pages 39, 40, 41)

9
With the replacement of professional bankers with GoP
appointees, the banks quickly lost their growth momentum
following nationalisation. Although the GoP was able to
extensively expand its branch network of public sector banks
during the early 1980s, this expansion was economically unviable
leading to declining profits for the banks. Over the same period
the banks inexperienced management contributed to an increase in
poor credit expansion and non-performing assets. The limited
regulatory authority of the SBP during the period led to a lack of
disclosure of the banking sectors poor performance.

Following the partial restoration of democracy in Pakistan in

1985, the newly elected government manipulated the banks to
serve its own ends in the assemblies. Under this process, loans
without adequate security were sanctioned to members to set up
economically unviable industries. This led to an increase in the
level of non-performing assets for banking companies.

Banking Sector Reforms of the early 1990s

After coming to power, Nawaz introduced a comprehensive set of
economic reforms that included the internationalization of capital
markets and the opening up of the financial sector to private
sector participation. The key areas were capital adequacy
standards, provisioning for non-performing assets, the partial
independence of the central bank, opening up of foreign currency
accounts by Pakistani nationals, better risk management and
procedural details for T-bill auctions (OMO details). Along with
these reforms, the government also issued licenses for the
opening of ten new banks in the private sector. The Sharif
government also initiated the privatization process in the
country.

10
 These reforms failed to boost the banking sector significantly due
to various factors. The factors included unstable macroeconomic
conditions, financially poor state of public sector banks and the
notorious yellow cab scheme. The reforms were further
undermined by the restricted freedom of nationalised commercial
banks and the limited power of the SBP that prevented it from
successfully implementing its prudential regulations.

The reforms did however change the landscape of the local

banking sector. The lack of market orientation of the LCBs
provided the NEPB with an opportunity to firmly establish
themselves in the market. Following the granting of permission
to open foreign currency accounts, the dollarisation of the
economy (foreign currency deposits to total domestic liquidity)
increased to 14% from 2.6% in1991. This dollarisation and lack
of local competition led to heavy investments by foreign banks in
Pakistan.

Banking sector reforms of 1996-1997

On 21 January 1997, the caretaker government promulgated 3
Ordinances that were later legislated by the Parliament. These
legislations relate to the Bank Nationalisation Act 1974, Banking
Companies Ordinance 1962 and State Bank of Pakistan Act 1956
and encompass the following reforms:

• The SBP will now have singular authority to formulate and

monitor monetary and credit policies in line with
recommendations of the Monetary and Fiscal Policies Co-
ordination Board.

11
• The SBP has also been granted the authority to strictly monitor
the limits set by the Board for borrowing by federal and
provisional governments.

• The Board of SBP will approve the credit requirements of the

private sector.

• The SBP will be the only regulatory body (the Pakistan Banking
Council has been abolished).

• The SBP has been empowered to nominate the President and

Board of Directors of nationalised banks. All private banks
are also required to seek approval from the SBP with regards
to nomination of their Chief Executives. All appointments
made by the SBP will be valid for three years. The appointee
can only be removed on charges of misconduct.

• The federal government has been stripped of its powers to issue

instructions to banks. Also, all notifications issued by the
federal government with regards to leasing corporations,
leasing companies and modaraba companies have been
rescinded.

Apart from the above 3 Ordinances, other measures introduced

during 1996-97 include the following:

• Banks have been asked by the SBP to improve their

capitalisation in order to improve their Tier 1 Capital
Adequacy Ratio to the internationally accepted 8%. However,
no specific deadline has been given for this purpose.

12
• An Ordinance has been passed for establishing a Resolution Trust
Corporation of Pakistan (RTCP) as a temporary entity to
acquire the infected portfolios of NCBs and DFIs. This is
similar to the trust funds established in the 1980s to bail out
the American Savings and Loans. However, the exact modus
operandi of RTCP's operation has not been finalised as yet.

Implications of the latest banking sector reforms

With this latest set of reforms the SBP now has the authority to
restrict government borrowing used to fund the budget deficit.
This will result in lower interest rates and a significantly larger
share of credit availability for private sector borrowing. By
stripping the governments powers from interfering in a banks
operations these reforms will substantially reduce political
influence/intervention in the banking sector leading to improved
credit quality.

Entrusted with the power to nominate the management of banks

the SBP has appointed private sector professionals to enforce
stricter credit policies and cut overheads with the aim of making
NCBs more attractive for privatization.

The government has announced a set of new foreclosure laws to

expedite the recovery of defaulted loans without having to engage
in a lengthy court process. The SBP has completely revamped the
disclosure laws and introduced a highly informative new format
for presenting annual accounts of banks.

13
 L A RG E CO M M E R C I A L BANKS ( NC B s AND
D E N A T I O N A L I Z E D B A NK S ) 1

NCBs are still the markets dominant players, controlling 51% of

the entire banking sector deposits and 50% of advances as of 31
Dec 1996. There are currently three NCBs remaining National
Bank of Pakistan (NBP), United Bank Ltd. (UBL), and Habib
Bank Ltd. (HBL), following the privatization of Allied Bank and
Muslim Commercial Bank (MCB) in which the GoP still maintains
a significant stake.

NCBs have the most extensive branch networks extending into

both the rural and urban areas of Pakistan. This provides them
with a competitive advantage over the NEPBs and foreign banks.
The extensive branch network has allowed NCBs access to a large
base of stable and low cost deposits. However, the maintenance
of extensive branch networks has led to high operational cost and
a large number of loss making branches causing NCBs to remain
relatively less profitable than their competitors. The loss making
branches are being identified and shut down as the NCBs prepare
for privatization.

As victims of political interference NCBs have acquired a large

share (roughly 58%) of total loan defaults. Inefficient operations
and high loan defaults have resulted in huge losses, decline in
shareholder equity and a low return on earning assets. Capital
adequacy ratios range between 2-5% for NCBs compared to over
8% for NEPB banks and the 8% needed to meet BIS requirements.

1
Banking Sector Report, June 1998 by ABN AMRO N.V. (pages 9 -10)
& ING BARINGS, Pakistan Research, June 1997 (pages 2 & 35)

14
 Deposits by banks
Advances by banks

Foreign
banks
25%

NCBs
50%
Private
sector
banks
25%

Foreign
banks
24%

NCBs
52% Private
Sector
Banks
24%

NCBs becoming more competitive

The restructuring of NCBs to prepare them for privatization has

involved the appointment of private sector banking professionals

15
 as heads of these institutions. Positive changes that the new
management has implemented involve:

• Lower interest rates and higher customer orientation allowing

NCBs to become more competitive.
• The closure of loss making branches with the voluntary
retirement of employees.
• Speeding up of the loan recovery process by NCBs with the
shortfall being covered through NPL provisioning. HBL has
put aside Rs5.6bn for doubtful debts for the year ended 1996
and retiring 1,079 employees. The bank intended to cut its
work force by 25% by the end of 1997.

Denationalized Banks

ABL, MCB and Habib Credit and Exchange Bank Ltd. (HCEBL)
are the first 3 banks to be denationalized.

• ABL was privatized in 1991 in an employee buy out deal. The

government still owns 49% of its shares.
• MCB was privatized in 1992. A 51% stake of MCB was sold to
National Group. The government still retains a 24% stake in
the bank.
• HCEBL, a subsidiary of HBL, was privatized in 1997. 70% stake
of HCEBL was sold to an UAE-based Al Nahyan consortium. The
government still owns 20% HCEBL.

Of the 3 banks, only MCB is listed. Both MCB and Allied have
shown a strong performance since privatization. From 1995-97
MCBs advances and deposits have increased at a CAGR of 22%.
However, these banks have also inherited many problems.

16
MCB was left with a Rs5bn bad debt portfolio (20% of outstanding
advances in1991). In 1996 MCB put aside Rs1.81bn to account for
the shortfall in loan loss provisions. Apparently, MCB had also
decided to shut down unprofitable branches to cut costs.

Allied Bank’s post privatization phase has been marked by severe

management problems, with successive management’s alleged of
being involved in corruption.

F O R E IG N B A N K S 1

Foreign Banks comprise 24% of total advances within the banking

system, but as a percentage of total profitability are far ahead. On
an after tax basis, foreign banks constitute 70% of the total banking
sector profit (excluding profits of NCBs which incurred huge losses
in 1996). Traditionally, the foreign banks have focused on short-
term trade finance, targeting mainly low risk blue chip clients and
high net worth individuals. More recently, foreign banks have also
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, especially that of credit cards. Head office support in
terms of international network and technology has enabled the
foreign banks to become important players in the corporate and
consumer-banking arena.

With the turnaround possibilities of LCBs foreign banks are likely

to face increased competition in the near future. With their
1
Banking Sector Report, June 1998 by ABN AMRO N.V. (page 11)
& ING BARINGS, Pakistan Research, June 1997 (pages 2 & 35)

17
international branch network and access to low cost funds LCBs will
be in a position to compete directly with FBs. Although, pending
WTO legislation could ease restrictions on FBs operating in
Pakistan.

P R I VA T E S E C TO R B A N K S 1

Allied Bank Limited (ABL), MCB and Habib Credit and Exchange
Bank Ltd. (HCEBL) are the first 3 banks to be denationalised, where
as, as a result of the Sharif government laying more emphasis on the
creation and strengthening of the private sector, new privately
owned banks emerged such as Askari Commercial Bank, Soneri
Bank, Prime Bank, Union Bank, Bank Al-Habib, Bolan Bank,
Mehran Bank, Platinum commercial Bank, Schon Bank and
Metropolitan Bank.
These banks are small in structure and assets and deal largely with a
very selective market segment, where these have been successful and
account for about 22% of the profitability of the entire sector.

Privatised Banks

1
ING BARINGS, Pakistan Research, June 1997 (pages 2 & 35)

18
MUSLIM COMMERCIAL BANK

MCB was privatised in 1992. A 51% stake of MCB was sold to

National Group. The government still retains a 24% stake in the
bank.
HCEBL, a subsidiary of HBL, was privatised in 1997. 70% stake of
HCEBL was sold to an UAE-based Al Nahyan consortium. The
government still owns 20% HCEBL.

ALLIED BANK LIMITED

Allied Bank Limited came into being due to the nationalization

scheme of the GOP. During the course of nationalization, four banks
namely Pak Bank, Sarhad Bank, Lahore Commercial Bank and
Australasia Bank were merged to form a new bank. Following
nationalization, the bank expanded its network to almost 900
branches.
The bank was offered for privatization in 1992. The employees and
the management group matched the highest offer which the PC
received from the private sector investors and as a result acquired
the bank.
Since privatization, the bank has achieved double digit growth in
deposits, advances and pre-tax profits. The bank's total income
including interest and non-interest income amounted to Rs. 3,287
million in 1995, its deposits were Rs. 51 billion and investments
were Rs. 16 billion in 1995. ABL earned a profit of Rs. 146 million
in 1995.1

1
ABL, Annual Statement 1995.

19
 PART II
LI F E C Y CL E O F M CB 1

Entrepreneurial Stage
Prior to partition in 1947, branches of British banks dominated
banking in Pakistan. The first domestic banking institutions
emerged in the 1940s, immediately proceeding and shortly after
Pakistan’s independence from Britain. Except for the NBP, which
was wholly government-owned, prominent merchant families
established the other three banks. The State Bank of Pakistan (the
central bank) was formed after Partition in 1948 and it assumed the
supervisory and monetary policy powers of the State Bank of India.
In 1955 the Government issued the State Bank Ordinance, explaining
the functions of the state bank in the emerging Pakistan2.

Muslim Commercial Bank Ltd. the third largest commercial bank and
the largest private sector bank in Pakistan, was incorporated on 9th
July 1947 in Calcutta. Following the partition of the Indian
Subcontinent, the head office of the bank was initially transferred to
Dhaka, before shifting to Karachi in 1956. The Adamjee Group was
the major sponsor of the bank. MCB soon earned a reputation of a
solid and conservative financial institution.

1
Managerial Policy Report (pages 3-10) & MCB Annual Statements, Chairman’s Report (1991-97)
2
ING BARINGS, Pakistan Research, June 1997 (page 42)

20
Collectivity Stage
During the 1960s, in Ayub era, greater emphasis was laid on massive
industrialisation. Medium and long term industries were set up,
which obviously required major financing. As a result the existing
banking sector got a boost and more banks were involved in
industrial financing. In this period MCB got prominence and
emerged as a major advancer of the industrial sector.
Major focus was on growth policies at that point in time as the
economy was facing a resurgence and growth prospects were bright.
Still in its early years, and because of a narrow reserve base, the
innovation process did not get the desired attention it deserved,
although schemes that were radical at that time were launched to
attract more corporate and consumer clients. Recently the trends
have been gained prominence and more emphasis has been on these
innovative processes.
Group sense developed at that point in time, has formed the core
values of the bank which can be seen today in its cultural values and
working norms.

Formalization and Control Stage

In 1974 the government of Zulfiqar Ali Bhutto nationalised all
domestic commercial banks. The Pakistan Banking Council (PBC)
was established, which assumed the role of a bank holding company
but with limited supervisory powers. Nationalisation of the banking
sector led to significant government interference and resulted in
directed lending to pet projects. The branch network of the
Nationalised Commercial Banks proliferated in an effort to provide
banking services to all regions/territories, without regard to the
viability or feasibility of such expansions.

21
Along with other banks, MCB was nationalised in January 1974 and
in June of that year Premium Bank Limited, was merged into MCB.
During this period the quality of the Bank’s loan portfolio
deteriorated. However, principally on account of its sound systems
and credit policies the amount of bad bank loans accumulated by
MCB was much lower relative to some of the other public sector
banks.1

Elaboration of Structure Stage - Lawai Era

In 1991 after the opening up of the economy, the Sharif Government

introduced the second set of banking sector reforms.
Deregulation of the financial sector and capital markets led to
mushrooming growth of banking companies in the private
sector. Several big industrial groups set up their own banks. In
1991 and 1992 respectively, Sharif Government privatised MCB
and ABL.

MCB was the first financial institution to be privatised on 2nd April

1991. A group of industrialists, the National Group acquired control
by buying a 26% stake for Rs. 800 million. The National Group was
comprised of ten major industrial groups including Nishat, Din,
Shafi, Husein, Ishaq, Universal, Ibrahim, Be Be Jan, Sapphire,
Sitara, Siddique and Chakwal. Almost all the groups had significant
exposure to cotton based textiles. During the first five years, the
private management concentrated on growth through utilising its
extensive network of branches and developed a large and stable
deposit base.

In February 1992, the government disinvested an additional 25% of

the shareholding of MCB through an offer for sale to the general

1
ING BARINGS, Pakistan Research, June 1997 (page 90)

22
public, which was heavily oversubscribed (5.5 times) despite
carrying a premium of Rs.46.15. In December 1992, the National
Group acquired an additional 24% of the shares of MCB at the same
initial acquisition price. Since privatisation, MCB has achieved a
compounded annual growth of 23% in deposits and advances.

When Hussein Lawai took over the management of MCB, he had to

deal with a lot of problems that were the legacy of nationalisation
era. After the nationalisation of banks in 1973, political stalwarts
wrung money in the form of un-secured or fake-named loans from
the nationalised banks. These institutions were also forced to hire
people on the criteria other than merit and for reasons other than
their need at the bank. Consequently, out of total bad loan portfolio
of Rs. 122 Billion for commercial banks, Rs. 85 Billion is lying
with the three NCBs, while foreign banks have only Rs. 6 billion as
bad debts. Privatised banks namely MCB and ABL also have a bad
debt portfolio of Rs. 11 billion, most of which has been carried over
from their nationalised days1. At the end of FY 1997, MCB had a
total non-performing loans worth Rs. 4.3 Billion. A total of Rs. 3.3
Billion of this amount was from the loans which are overdue by
three or more years. So, almost three-quarters of the bad loans of
MCB are from the loans made during nationalisation era.2

Poor recruitment policies have resulted in a low quality human

resource base as well as overstaffing at these nationalised banks
compared to foreign and new private banks. This results in higher
operating costs per rupee of deposit and consequently lower profits
for these banks.

1
Business Recorder, August 17, 1998.
2
MCB Annual Statement, 1997.

23
Capital adequacy ratios during Mr. Lawai’s time declined initially
but then improved later on as can be seen in the ratio analysis
section of this report. Part VII, i.e. the ratio analysis section also
shows that the profitability also improved during Mr. Lawai’s time.

Most interestingly what part VII shows is that though there is a

continuation of trend of improved operating efficiency, there is also
increasing number of branches that are being opened. In fact,
increase in number of branches is highest at this time during the ten
year period under consideration in part VII1.

C h a n g e o f M a n a g e m e n t - M i a n M a n s h a Ta k e s O v e r
On 21 January 1997, after the new management headed by Mian
Mohammed Mansha took over in late 1996, the caretaker government
promulgated 3 Ordinances that were later legislated by the
Parliament. This legislation relates to the Bank Nationalisation Act
1974, Banking Companies Ordinance 1962 and State Bank of
Pakistan Act 1956. After implementation of these reforms the SBP
was given singular authority to formulate and monitor monetary and
credit policies in line with recommendations of the Monetary and
Fiscal Policies Co-ordination Board. The Board of SBP was given
authority to approve the credit requirements of the private sector.
The SBP was made the only regulatory body of financial
institutions(the Pakistan Banking Council was abolished). The SBP
was empowered to nominate the President and Board of Directors of
nationalised banks. All private banks were also required to seek
approval from the SBP with regards to nomination of their Chief
Executives. The federal government was stripped of its powers to
issue instructions to banks.

1
Ratio Analysis, ‘Part VII’

24
After the above ordinance the banks have been asked by the SBP to
improve their capitalisation in order to improve their Tier 1 Capital
Adequacy Ratio to the internationally accepted 8%. However, no
specific deadline was given for this purpose. The SBP has also
almost completely overhauled the disclosure laws in Pakistan.
Starting 31 December 1997, all banks were required to provide
detailed information about their assets and liabilities such as:
sectoral allocation of advances, maturity profile of both assets and
liabilities, details of NPLs and the reserves held against them,
foreign currency exposure, and asset structure. These new
disclosure laws will significantly enhance the transparency of
banks’ operations and improve the analysis of banking companies.

Mian Mansha’s management also introduced restructuring in the

organisation. Restructuring has been started at a slow but gradual
pace. All the branches have been divided into two categories:
Consumer and Corporate. The classification of a branch into these
categories is done on the basis of the level of import/ export
business, deposit level and profits. The classification is done to
determine the focus of these branches.

The new President and chairman has hired professionals at the top
management level of the organisation to inject new ideas and
professional management practices in the organisation. Along with
new people, new departments have also been established. Consumer
Banking Group has been established for product development and
centralised marketing of the bank. Strategic Management and
Business Process Reengineering Department has been established to
revamp different processes carried out in various departments of the
bank. The department has developed strategic management process
for the organisation in addition to the mission statement and vision

25
statement for the bank. It has now started pushing these ideas down
in the organisation.

MCB in its first year under Mansha’s management has continued to

show good financial performance as its ROI and ROE recovered to
pre 1996 levels. The ratios of 1996 in particular were not good due
to huge provisions for bad debts taken that year. Capital adequacy
ratios not only recovered but improved beyond previous levels.(see
part VI)

One figure that shows departure from norm is that of number of

employees. This fell by 1,119 from 14,729 in 1996 to 13,610 in
1997(see part VI). The number of employees fell for the first time
since first year of privatisation( Head count further fell to 12,882 at
June 30,1998 signifying a reduction of 13% over December 1996).
Number of branches also showed a decline of 11, reversing the post
privatisation trend of increasing branch numbers(see part VI). These
numbers are in line with policy announced by chairman Mansha of
‘right sizing’ in his review in MCB’s annual report of 1997.
According to this policy more branches would be closed and more
employees are likely to leave under various voluntary separation
schemes.

O P E R AT I O N S 1

The organisational structure of MCB can be termed as a ‘Hybrid

Structure’, where services of same nature have been grouped
together. Two major line function divisions of MCB are 1)
Consumer Banking and 2) Credit & Risk Management.
1
Managerial Policy Report, MBA-IV report, submitted to Dr. Mahnaz Fatima (pages 13-17)
& Interviews Conducted At Respective Departments

26
Consumer Banking

The function of Consumer Banking wing is to develop and offer

services to the target market which includes both the corporations
and individuals. The departments included in this wing are given
below:

Travellers Cheques
Travellers cheques services were started in 1993 under Hussein
Lawai’s management. MCB has the market leadership in this area
with a share of over 85% in market followed by HBL 8%, NBP 4%
and ABL 2.5%. In the initial stages, the department faced the
difficulty in quick verification of the cheques, however now they
have televerification system, which has links with all the branches,
and keeps updated information about the clients.

MCB Master Cards

Credit cards department of MCB has mainly been targeting only the
existing account holders of the bank. This is done in order to avoid
incurring of bad debts, which are quite high in the industry.

Business Development and Marketing Division

The function of this department is collection of every type of
information from all the branches through regional and circle
offices and also to classify and consolidate information and its
presentation to the management of the organisation, evaluation of
performance of the branches according to the objectives, and taking
corrective actions against any deviations in the performance. The

27
problem faced by this department is of communication. Due to poor
communication system the data processing takes almost one month
which considerably delays the process of analysis and
implementation of corrective action. As a result of which, several
other departments which have to rely on BDMB can not successfully
formulate their strategies.

Information Resource Management Division

The function of this department is to provide resources so as to
manage the information requirements of various departments.

Consumer Banking Department

This department has basically been assigned the function of product
development and marketing of all the products.

Credit & Risk Management

Credit & Risk Management division is divided in to 1) Industrial

credit department, 2) Agriculture & Small Loan department
and 3) Credit Management Department.

The functions of first two departments are to achieve the objectives

given to them by the executive committee of the bank. While the
credit management department basically monitors the performance
of the first two departments with respect to the value and risk of the
credit.
The Bank also has the following Divisions:

28
Treasury and Accounting Division
Treasury and Accounting Division has 1) Treasury & Fund
Management Department, 2) Central Accounting Department and
3) Foreign Trade & Exchange Operations Department.
Treasury & Fund Management Department is responsible for
managing short-term surplus or deficit of the funding requirements.
It can not play its role effectively at MCB since it cannot get timely
information regarding the total liabilities and assets of the bank.
Central Accounting Department is responsible for managing
accounting records submitted by different departments and
divisions.
FT&EO Department controls all the foreign trade related
transactions including opening of L/Cs (Letters of Credit) and
guarantees, and management of remittances. The activity in this
department has subsided significantly since Pakistan carried out the
nuclear explosion.

Human Resource Management

Human Resources Division comprises of 1) Human Resources
Department and 2) The Training Department. The function of HR
Department is to manage human resources by retaining and
recruiting, while training departments engages in training and
developmental activities for various departments of the bank.
Additional divisions of MCB are:
1. Legal Affairs & International Division
2. Corporate Affairs Division
3. Audit & Inspection Division
4. Fraud & Forgery Prevention Division

29
 MCB ACCOUNTS 1

P a k R u p e e C u r r e n t Ac c ou n t

MCB’s Pak Rupee Current Account offers the convenience of

unlimited withdrawals i.e. access to one’s funds whenever he
wants without any notice. There is no limit on the number of
transactions one make in a day plus you can avail finance
facility upto 75% of the total deposit.

1
CONSUMER PERCEPTION SURVEY, ‘Marketing of Financial Services’ report, presented to
Mr. Farrukh Hassan (Marketing Research Course), (pages 6-7) also
MCB Annual Statement 1991 & MCB Product Brochures

30
In addition, you have access to a countrywide ATM network
convenient cash accessibility 24 hours a day. The facility also
provides one with unlimited daily transactions with a limit on
maximum withdrawal amount through the ATM machines.

P a k Ru p e e S a v i n g s A c c ou n t
MCB’s Pak Rupee Savings Account offers attractive returns on
Pak Rupee investment.

In addition, one has access to a countrywide ATM network

convenient cash accessibility 24 hours a day. The facility also
provides unlimited daily transactions with a limit on maximum
withdrawal amount through the ATM machines.

P a k Ru p e e T e r m D e p o s i t s
MCB Pak Rupee Term Deposit gives a higher rate of return.
Choice of 1 month, 3 months, 6 months, 1 year, 2 years, 3
years, 4 years and 5 year term deposits.

Kh u sh a l i B a c h a t A c c o u n t
A Rupee savings account is one of Muslim Commercial Bank’s
most popular products. Due to the low initial deposit, the
account can be opened by people from all walks of life and still
avail the facility of daily product profit calculation.

The account offers unique and attractive benefits to the

Account holders:

• Open a Khushali Bachat Account with a minimum initial

deposit of RS. 2,500

• Profits are calculated on daily product basis at the savings

rate and payable on a half yearly basis

31
• One can open your account at any of 1,200 branches nation-
wide

SAVING 365
Saving Account with Current Account Facilities

• The MCB Saving 365 calculates profits on a daily product

basis and gives one the facility of unlimited withdrawals.

• One can open a Saving 365 Account with a minimum initial

deposit of RS. 500,000

• Profits are calculated on daily product basis payable on a

half yearly basis

• No restrictions on the number of withdrawals

• One can avail a credit facility up to 75% of the total deposit

value

M C B Ru p e e M a x i m i z e r A c c o u n t
A latest PLS Savings Account specially made to help MCB
Foreign Currency Account holders to convert their account into
Pak Rupees. It gives individuals, businessmen and
corporations the chance to earn a high rate of return on their
deposits in Pak Rupees.

The account offers unique and attractive benefits to the

Account holders:

• Profits calculated on a daily product basis

• No restrictions on number of withdrawals

32
• No restriction on initial deposit

• Free ATM Card to each customer

• Locker facility free of cost

33
 MCB PR ODUCT S 1

M C B Ru p e e T r a v e l l e r Ch e qu e
Muslim Commercial Bank Limited has been at the forefront of
providing it’s customers with new and innovative products and
financial instruments that are safe, secure and profitable.

MCB Rupee Travellers Cheques were first introduced in 1993

as a safe way to pay for high valued purchases. The product
has become extremely popular and is used by consumers in all
walks of life – for business dealings, high value transactions or
purchases, MCB Rupee Travellers Cheques are Ideal for Every
Deal.

• As Good as Cash – Can be used safely and conveniently to

make all kinds of payments

• Easily Purchased – One can buy them at over 500

designated MCB branches across Pakistan

• Easily Encashed – Promptly and easily encashed at any

designated MCB branch

• Easily Refunded – In case of loss or theft the amount is fully

refundable

• Exclusive Security Features – Printing with special security

features
1
CONSUMER PERCEPTION SURVEY, ‘Marketing of Financial Services’ report, presented to
Mr. Farrukh Hassan (Marketing Research Course), (pages 8-10), also
MCB Annual Statement 1991 & MCB Product Brochures

34
• Valid Until Used – No expiry date

• Denominations – Available in RS. 1,000, RS. 10,000 and RS.

50,000 denominations

• 24 hour service available at MCB booths at Karachi, Lahore

and Islamabad airports

• Only MCB Rupee Travelers Cheques provide the special

feature of Televerification whereby one can call number and
find out about any lost or stolen Travelers Cheques. This
service is available 24 hours in Urdu and English.

Master Card
Since the beginning of time, people have tried to find more
convenient ways to pay, from gold to paper money and checks.
Today, money is moving away from distinct hard currencies and
towards universal payment products that transcend national
borders, time zones, and, with the Internet, even physical
space.

Plastic or "virtual" money, credit, debit, and electronic cash

products, inevitably will displace cash and checks as the
money of the future.

• Master Card International has expanded globally in more

locations in the world than any other card.

• The card was introduced by Muslim Commercial Bank

Limited in 1995 and now offers card members over 12
million outlets in 232 countries.

35
• Photo security – The first bank in Pakistan to introduce the
enhanced feature of your photograph on the card limiting
fraud in case of card loss

• Welcomed at over 3,000 outlets in Pakistan

• Provides upto 45 days Free Credit

• Free Travel Insurance of RS. 3.5 million

• 24 Hour Customer Services – One can call 111-800-800 and

get information from customer services representatives on
new card application or have queries resolved anytime of
the day

• Cash Advance Facilities available in Pakistan and world-

wide

• World Travel Facilities – Utilize travel desk facilities for air

or hotel reservations, visa arrangements

M C B C a p i t a l G r o w t h C e r t i f i c at e s
It provide one an excellent opportunity to double savings.
Investing in a Capital Growth Certificate can double deposit
amount in five years.

• Minimum deposit of RS. 10,000

• Deposit to remain fixed for five years

• One can avail a credit facility up to 75% of the total deposit

value

36
T h e L a rg e s t A T M N e t w o r k I n P a ki s t a n
The largest ATM network supported by the largest private bank
in Pakistan offers over 70 ATMs in five major cities. ATMs are
located at safe locations in high traffic areas at the branch
premises, and two off-site ATMs are located at the Karachi and
Lahore airports.
Muslim Commercial Bank is committed to provide its customer
transaction ease, flexibility and convenient banking.

With the MCB ATM 24-Hour Cash Card a Muslim Commercial

Bank customer can:

• Access over 70 machines in five major cities in Pakistan

• Request for their account statement

• Order a new cheque book

• Select between two languages, Urdu and English, for the on

screen transactions

• Withdraw cash immediately instead of waiting in long queues

and delays at the branch

PART III

37
 MEGA ENVIRONMENT

E c o n o m i c En v i r o n m e n t 1
Π
Monetary Policy
After the financial sector reforms imposed by the IMF, the monetary
policy has been totally handed over to State Bank of Pakistan (SBP).
SBP has tried to follow a tight monetary policy but excessive
government borrowing in the past has thwarted SBP efforts to
reduce or at least control inflation. But according to latest SBP
figures CPI has increased by 6.9% during the period of July-August,
98 while during same period last year CPI moved up by 11.2%.

Perceived Problems
In the wake of the uncertain and ambiguous economic environment
of the country, MCB has adapted the policy of reactive change,
where only perceived problems, threats, and opportunities warrant a
response from the management. A perceived problem in the existing
scenario is that of the severe liquidity crunch the financial markets
are facing these days. Even at MCB, about Rs.12 bln are lying idle
and being advanced out as low as at 0.25%. To deal with this
problem, the management has decided to mobilise the currency so
that this idle money could be used to bring in more funds.
One step taken is that some of this money has been allocated to the
opening of around 60 new branches in the rural sector as it has been
identified as a major revenue generating sector. Also, since already
MCB boasts of being the pioneer in computerizing its rural
branches, these new branches would also require a computerized
network. Also, all the furniture and the fresh hirings would have

1Π
Managerial Policy Report, MBA-IV report, submitted to Dr. Mahnaz Fatima (pages 3-6)

38
their own costs associated as well. So, most of the liquid money is
going into this plan.

Perceived Threats
A current major threat is posed by the post-blast scenario along with
the unsafe and uncertain environment of Karachi, Pakistan’s largest
city and its financial headquarter. Due to this most of the potential
investors are driven off. Already Pakistan has a rating of ‘-C’ in
investor preference. This has meant a reduced economic activity
phase in the country. For this threat SCB is striving to achieve cost
leadership by reducing expenses at various lesser productive
branches. Also major irregularities were detected in the medical
expenses figures, which were curtailed from Rs.5 mln to Rs.2 mln.
All these steps would and are enabling SCB to stay competitive in
this ferociously competitive scenario. Lack of foreign investment
has given SCB the opportunity to look more closely into the
prospects of import and export activities. Already, MCB exports
pharmaceutical, surgical and textile goods. Currently SCB is looking
into the prospects of expanding further in the surgical and textile
sectors while also stepping into the sports goods field. In this
regard talks are being held with the related EPB personnel. Results
on these would be seen within the next two years with increased
mark-up figures.
Other potential threats include the emergence of more private sector
and foreign banks as competitors. Already Citibank Visa and ANZ
Grindlays Master Card are major competitors of the MCB Diner’s
Club and MCB Master Card. For this purpose, SCB is adapting the
policy of internal scrutiny first and then bringing in more clients.
Also, the threat of the worsened law and order situation in the city
poses a threat to the bank’s own operations at various strategic
localities in the city.

39
E c o n o m i c S c e n a r i o A f t e r Th e Nu cl e a r O p t i on 1

The nuclear blast radically changed the economic scenario of the

country. One of the most affected sector has been the banking sector
and following issues have emerged since the blasts.
Slower Credit Expansion
Private sector credit growth has been showing signs of decline. In
the first quarter 1998, private sector credit declined by Rs.33
billion. This has been mainly caused by SBP directives that bars
corporations from collateralizing their frozen foreign currency
2
accounts for seeking credit, as well as by economic slow down.
Lower Trade Finance Activity
After the nuclear explosion by Pakistan, the government has
introduced various exchange controls and mechanisms, which have
affected the pace of trade activity in Pakistan. It is estimated that
the cost of imports of gone up by 15-20% due to the introduction of
Multiple exchange rate regime. Consequently, imports have declined
by 21.4% during July-September 1998. At the same time exports
have also shown a decline of 9.3%. So this has affected another
major source of earnings for the banking industry.

Disintermediation
At the time of atomic explosion on May 28, 1998 there were USD
11.8 billion worth of private sector deposits in the financial sector.
After the government announced the freeze on FC accounts
approximately USD 3.2 billion deposits have been converted into
rupee accounts. The conversion at the rate of Rs. 46/ dollar has
created Rs. 147.2 Billion worth of new rupee deposits 3. However,

1
Managerial Policy Report, MBA-IV report, submitted to Dr. Mahnaz Fatima (pages 11-13)
2
DAWN, October 14, 1998.
3
DAWN, September 17, 1998.

40
the actual increase in rupee deposits is minimal. This has resulted in
contraction in the deposit size of the financial sector.
Disinflation
Due to economic slow down the rates of inflation is going down.
Consumer price index has shown an increase of 6.8% during July-
August 1998 on year-on-year basis. This rate was 11.2% last year 1.
The decline in the rate of inflation has been a minimal decline of
0.84% in nominal interest rates causing real interest rates to go up.
The rise in real interest rates can cause undermining of the value of
the collateral for the loans. It also increases the probability of
default by the creditors.
Non Performing Loans
It is estimated that a total of Rs. 216 billion of deposits of the
financial sector are bad debts out of which the Nationalised
Commercial Banks (NCBs) have Rs. 85.2 Billion. worth of bad
debts. This is almost 20% of the total deposits of the banking
sector. The high proportion of bad debts in the loan portfolio of the
banking industry depicts poor quality of assets and can adversely
affect the future earnings of the industry.

Monetary Policy
After the financial sector reforms imposed by the IMF, the monetary
policy has been totally handed over to State Bank of Pakistan (SBP).
SBP has tried to follow a tight monetary policy but excessive
government borrowing in the past has thwarted SBP efforts to
reduce or at least control inflation. But according to latest SBP
figures CPI has increased by 6.9% during the period of July-August
‘98 while during same period last year CPI moved up by 11.2%.
Also SBP lowered the Statutory Liquidity Requirement (SLR) from
18% to 15% after the nuclear blasts to accommodate the conversion

1
DAWN, October 2, 1998.

41
and liquidation of frozen foreign exchange accounts, but now its
back to 18%.1
Freezing of Foreign Currency Accounts
SBP declared the Statutory Liquidity Requirement (SLR) from 18 to
15% after the nuclear blasts to accommodate the conversion and
liquidation of frozen foreign exchange accounts, but now its reduced
it back to 18%.
Also, after the nuclear explosion the SBP ran into a frenzy by
issuing different regulations almost every day. This created a
serious problem in the day to day operations of the bank and the
overall efficiency suffered. This situation is being dealt as an
opportunity problem. To convert it into a favourable situation
MCB is launching schemes such as MCB Rupee Maximizer, MCB
Instant Finance, and MCB Savings Instant. This is to encourage the
masses to save their unutilized funds where they can be mobilized to
drive the economy out of its financial crunch.

S o c i al An d C u l t u r a l E n v i r on m en t 2

Inherited Problems
Pakistan has one of the lowest literacy rates in the world. Only 37%
of the total population can read or write their own names. The high
level of illiteracy has hampered proper documentation of all
economic activities. Loose monitoring of laws has enabled a lot of
people to not report their economic activities properly.
Consequently, a huge portion of economic is undocumented. Along
with this, Pakistan has failed to develop a culture of savings. The
official savings rate has been hovering between 13 to 15 percent.

Potential Problems and opportunities

1
DAWN, October 2, 1998.
2
Managerial Policy Report, MBA-IV report, submitted to Dr. Mahnaz Fatima (page 5-6)

42
Low saving rates coupled with high level of informal economy
makes our economy an unbanked economy compared to other
countries. This can be tipped as a great opportunity problem for
banks to capitalise upon. Banking industry can increase its efforts to
create awareness among people about the usefulness and the
advantages of the banking services and so, can increase their
customer base along with finding ways to grow sustainably. The
government also has to expedite its efforts to increase the level of
documentation in the economy.

Probable Solutions
In the current situation when, the deposit growth efforts of the
industry has seriously been hampered by the changes in the political
environment, the banks can change their focus to increasing the
number of services and creating awareness about them. The
emphasis must be on strengthening customer loyalty, and as
especially in our culture where people prefer long term relationships
this step can greatly increase one’s customer base.
At the SCB, this has been identified as a major opportunity and our
strength already lies in our strong customer relations. For this
purpose, newer schemes with emphasis on customer satisfaction
must be launched as in our society usually more customers come in
by ‘word of mouth’. So a satisfied customer largely means more
customers. For example, banks can make increased efforts to create
awareness about credit cards and Rupee Travellers Cheques, which
have a great potential to grow.

Weaknesses and Corrective Measures

On the social aspect, we see that representativeness is prevalent in
the bank. It is some what biased towards women as none hold a high
level post. On this front SCB is looking closely into the matter and

43
is adopting a changed policy from the past. Women and other
minority groups are coming up the ladder of the heiarchy.
Another weakness prevalent in the bank’s operations is largely a
legacy inherited from the pre-privatization era, i.e. over-staffing.
Even at present, we can clearly identify this as a major reason for
the increased inefficiencies of most of the sick units being run by
the government. In this regard, SCB is adapting the policy of
retrenchment and reengineering. In the process, the ‘golden
handshake scheme’ was offered to all of its employees at all
managerial levels with some modifications. The results were very
successful as we were able to lay off a large proportion of our
unneeded staff.

Strengths
One major advantage that the SCB has is that its structure is well
defined and has been followed for such a long time that it has
developed into a well integrated unit. SCB has adapted a hybrid
structure with the top management categorized under the functional
structure while the middle and lower management come under the
divisional structure.
This has created an environment in which vertical co-ordination
has been encouraged between the various heiarchial levels. In this
regard middle and lower managers are encouraged to participate in
and make decisions at their own levels. They are also given greater
confidence by sharing the viewpoint of the senior management with
them.
Another aspect of our organizational structure is that it is a flat
structure. This promotes faster decision making and reduced work
load for the top management and has encouraged specialization in
the respective fields of operations.
Another prevalent trend in the SCB has been its emphasis on the
promulgation of a mixture of the bureaucratic and clan control

44
which has enabled the employees to interact more amongst each
other, giving rise to greater employee relations.

P o l i t i c a l En v i r o n m e n t 1

Pakistan has always had a political structure where personalities

have determined the state of institutions. Consequently, the system
of checks and balances have never been imposed properly. Any
personality in power has manipulated the working of institutions in
Pakistan. The same has happened to the financial institutions. After
the nationalisation of banks in 1973, political stalwarts wrung
money in the form of un-secured or fake-named loans from the
nationalised banks. These institutions were forced to hire people on
the criteria other than merit. Consequently, out of total bad loan
portfolio of Rs. 122 Bln for commercial banks, Rs. 85 Bln is lying
with the three NCBs while privatised banks namely MCB and ABL
have a bad debt portfolio of Rs. 11 bln. While foreign banks have
only Rs. 6 bln as bad debts. Poor recruitment policies have resulted
in a low quality human resource base for these nationalised banks
compared to foreign and private banks. This results in higher
operating costs and consequently lower profits for these banks.
Political un-stability has also been a major problem for the banking
industry. Changing governments follow different policies, which
make the industry to change their strategies. This hampers the
process of long range planning and all plans have to be made on a
short-term basis.

1
Managerial Policy Report, MBA-IV report, submitted to Dr. Mahnaz Fatima (page 6-7)
& MCB Annual Reports 1995, 97 ‘Chairman’s Review’

45
T e c h n o l o g i c a l En v i r o n m e n t 1

In Pakistan, it is commonly held belief that, the latest the

technology the better it is. Well, this does not hold true in the
banking sector at least. In Pakistan, because of the cultural and
social factors as well as lack of infrastructure, the latest technology
is not the best solution always.
The above fact is especially apparent in the lack of popularity of
Automated Teller Machines (ATM) in Pakistani market. The main
reason being cited for this lack of popularity is that the clients of
the banks are uncomfortable with dealing in money with machines.
Most bank clients in Pakistan prefer to deal with human tellers
because an ATM works under the Cybernetic Control System
principle, as it keeps a record of all checks and balances by itself
without any intervention.
Despite the client attitude, the banks are going ahead with the
introduction of latest technology products. They are trying to offset
client attitudes through raising awareness about the products and the
benefits that they bring to the clients. And banks are having some
successes too, especially with the corporate clients where most of
decision-making is based on rational cost and benefit analysis. An
example of this being Cash Management Group of Citibank whose

1
Managerial Policy Report, MBA-IV report, submitted to Dr. Mahnaz Fatima (page 7-8)

46
success has caused other foreign banks to come up with their own
Cash Management departments.
Also, by adapting the strategic alliance policy undergoing the
technological transfer process, in 1995 MCB successfully installed
the SWIFT Network, thus becoming the first Pakistani bank to be on
the international network SWIFT is the “Brussels-based Society for
Worldwide Interbank Financial Telecommunications Network. Thus
MCB is part of the international organization of 2795 banks that
own this network. This alliance was created to standardize, develop,
and control a network for electronically transferring funds across
borders.”1 Technological transfer is the transmission of technology
from those who posses it to those who do not. MCB management
followed the rational decision making process in incorporating the
SWIFT Network.
Technological Component
625 of the total 1320 branches of MCB are computerized, whereas
plans are afoot to computerize any new branch that is opened,
especially in the rural sector. Also MCB has 50% of its branches on-
line. 34 of its branches in the major cities, i.e. Karachi, Lahore,
Faisalabad, Rawalpindi and Islamabad, are connected to the SWIFT
Network. 50 ATM’s are also installed in these five major cities.

Perceived Threat
A major threat that all the computers in the world are facing at the
moment is that of the ‘Year 2K Bug’. This threat has been identified
at the bank as well, and measures are afoot to tackle the issue
before its too late. In this regard, SCB is bringing in the latest
software, in steps, to completely reprogram its hardware.

1
Managing Information Systems & Technology, Chapter 19, Management, Bartol & Martin

47
 TASK ENVIRONMENT
G o v e r n m e n t Ag e n c i e s 1
Regulatory Framework and Disclosure Laws

In 1991, following the opening up of Pakistan’s economy, the World

Bank approved a Financial Sector Adjustment Loan (FSAL) to help
fund the structural changes in the Pakistani finical sector.
However, this loan carried some covenants. These forced the State
Bank of Pakistan to introduce Prudential Regulations for the banks.

Important Prudential Regulations

Limits of a bank’s exposure to a single person

The total outstanding financing facilities by a banking company to

1
Banking Sector Report, June 1998 by ABN AMRO N.V. (pages 7-8)
& ING BARINGS, Pakistan Research, June 1997 (page 45)

48
any single person shall not at any point of time exceed 30% of the
bank’s unimpaired capital and reserves, subject to the condition that
the maximum outstanding against fund based financing facilities do
not exceed 20% of the unimpaired capital and reserves. In the case
of branches of foreign banks operating in Pakistan, the maximum
exposure limit of 30% shall be calculated on the basis of their
assigned capital.

Contingent Liabilities
Contingent liabilities of a bank shall not exceed at any point of time
10x its paid up capital and general reserves free of losses. In case
of branches of foreign banks operating in Pakistan, capital will
mean capital maintained under section 13 (3) of the Banking
Companies Ordinance 1962. Contingent liabilities that arise on
account of guarantees against guarantees liabilities. For the purpose
of clarification, a guarantee which does not appear in the book
maintained in Pakistan by a foreign bank and if invoked does not
require the said bank in Pakistan to honor the same, shall not be
counted towards determining exposure for the purpose of the
Prudential Regulations.

Financing Shares of Companies

No bank shall provide unsecured credit for the subscription of the
shares floated by a public limited company. No bank shall provide
any fund or non-fund based facility against the security of shares of
a non-listed company. Financing against the shares of a public
limited listed company shall carry a margin ranging from 20-50%
for different cases.

Provisioning for loss and other assets

The provisions are to be made at the specific percentage on the ‘net
difference’ (i.e., the difference between the outstanding balance of

49
principal and amount of liquid assets realizable without recourse to
a Court of Law). The unrealized mark up and interest on classified
facilities is to be kept in a Suspense Account and not to be credited
to an Income Account. The bank shall provide the following
provisioning in respect of its risky assets:

Required Provisions For Non-Performing

Assets AAssetAAAaaaaaaas Assets % of net difference
Short-term facilities
Interest/principal is overdue by 90 days 0
180 days 20
One year or more 50
Beyond two years 100

Long-term facilities
Interest/principal overdue by more than 180 0
days
More than one year 20
Two years or more 50
Beyond three years 100

Reserve Requirements

Apart from the Prudential Regulations, banks are also required to

maintain the following reserve requirements:

Cash Reserve 5% of FC Demand and Time

Liabilities and 3.5% of LC
Demand and Time Liabilities
must be kept as cash reserves

50
 with the SBP
Statutory Liquidity Reserve 15% of Demand and Time
Liabilities must be invested in
government securities and/or NIT
units

Disclosure Laws

The SBP has almost completely overhauled the disclosure laws in

Pakistan. Starting 31 December 1997, all banks would be required
to provide detailed information about their assets and liabilities
such as: sectoral allocation of advances, maturity profile of both
assets and liabilities, details of NPLs and the reserves held against
them, foreign currency exposure, and asset structure. These new
disclosure laws will significantly enhance the transparency of
banks’ operations and improve the analysis of banking companies.

Impact on MCB and its Policies

All the regulations imposed by the SBP have been adopted by SCB
and its management team has already started drafting policies
regarding its course of action based on these policies. One positive
step taken by the SCB is to introduce strategic controls in which a
panel of experts from the field & treasury division has been
delegated to constantly stay in touch with the stock exchange and its
proceedings on a daily basis. Their purpose is not only to monitor
its own performance but also that of all its competitors and the
whole of the market. Another panel of experts has been delegated
the role to stay in touch with the different government agencies
continuously and also with the government itself, so as to press
home their point of view in all matters relating to the major
decision making processes.

51