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Profits of Banks/SMEs/Microfinance

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Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

Banks continued making profits during the first half of 2021. They made profits not only on heavy investment in government debt securities but also on private sector credit.

Banks’ net lending to the private sector in July-June 20-21 got a boost during the second half ie January-June 2021 — when extraordinary monetary easing (carried out during March-June 2020) and fiscal stimulus package of the government had a fuller impact on credit demand with some time lag.

Between mid-March and end-June 2020, the State Bank of Pakistan (SBP) had cut its key interest rates, in quick installments, by 650bps —from 13.25 per cent to 7.5pc. In the entire 2020-21 banks made net lending of Rs766 billion to the private sector. But the bulk of this lending was made in Jan-June 2021. Between July-Dec 2020, credit demand had remained slower as the economy was experiencing a pandemic-triggered recession. (In 2019-20 i.e. between July 2019 and June 2020 Pakistan’s GDP growth remained negative by 0.5pc).

With the pickup in credit demand from January this year, volumes of non-performing loans of banks should have increased which, in turn, should have increased provisioning against these loans. But that did not happen because of the easing of regulations of non-performing loans permitted by the central bank during March-June 2020 and even afterwards.

The central bank had selectively eased these conditions to provide temporary relief to the Covid-19 hit private sector. And, the federal government had backed up the move with credit guarantees and by picking up part of the interest payments on bank loans of these sectors including agriculture and small and medium enterprises (SME).

During the first half of 2021, after-tax profits of Pakistan’s 18 listed banks grew 13pc year-on-year to Rs134bn, according to a Topline Securities research report. The profits were up “on strong deposit growth, rising non-interest income and lower provisioning,”

At uncertain times the banking industry should behave more responsibly. Banks already struggling with structural, regulatory or efficiency issues should work harder to address them. The central bank should watch more carefully what exactly is driving up profits of a few banks much faster than others

During the second quarter (April-June 2021), too, banks’ after-tax profits showed 14pc growth compared to the second quarter of 2020 and 8pc growth over the first quarter (Jan-March 2021), the report reveals. The 13pc year-on-year growth in banks’ post-tax profits in Jan-June 2021 occurred despite a modest 2pc decline in their net interest income because non-interest income increased and non-interest expenses shrank.

On face value, these numbers look good — if not impressive. But while looking at bank-wise breakup of after-tax profits in the 2Q2021, one notices that six out of the 18 banks rather reported a net decline in after-tax profits. And, even among the 12 banks that made post-tax profits growth in profit rates oscillated between a wide range of 1pc and 74pc.

This raises questions about the operational efficiency of the banks that made very little profits. This also raises questions about what actually helped those banks whose profit rates grew phenomenally. At uncertain times like when an economy is hit by a pandemic, the banking industry should behave more responsibly. And, banks already struggling with structural, regulatory or efficiency issues should work harder to address them. At the same time, the central bank should watch more carefully what exactly is driving up profits of a few banks much faster than others. It is heartening to note, however, that all 18 banks posted some gains in their net interest income in April-June 2021.

However, the size of their profits varied depending upon the size of the banks, their level of penetration in the government debt securities market and their outreach to the private sector borrowers. Will strong deposit growth, rising non-interest income and lower provisioning — the three key drivers of growth in banks’ profits in the first half of 2021 identified by Topline Securities — continue in the second half?

Well, that depends on (1) whether the economy remains on track to achieving 4.8pc growth targeted (2) whether higher tax collection and documentation drive gains more momentum or lose some steam and (3) low-interest rates stay till June. If the economic growth starts faltering or if the ongoing efforts for higher tax collection and documentation of business transactions weaken then growth in deposits should suffer.

A measured and gradual tightening of interest rates — if it is undertaken for some time to ease inflationary pressures (first it was raised 25 bp but in November it was raised by 1.5 % making the SBP prime rate as 8.75%) — should not affect the non-interest income of banks. But a sudden and sizeable monetary tightening would. Banks normally focus more on non-interest income growth when their interest incomes remain low in a lax monetary policy regime. But the tightening of interest rates gives them room to increase banking spread and they may lose focus on non-interest income.Increased lending to agriculture, SMEs of all types including those in the manufacturing sector or wholesale and retail trade and all other least-served segments of borrowers can help them raise net interest incomes, reflecting positively on their overall profit. HBL wins Best Bank in Pakistan 2021 award by Euro money. Their profits vary depending on how they get the money and how they invest them.while raising the cash reserve requirement or CRR for banks on Nov 13, it decided that one-year plus time liabilities of banks would continue to remain exempted from CRR. “This will encourage banks to raise more long-term deposits, which will facilitate asset-liability matching and enable banks to extend long-term loans for construction and housing finance,” the SBP said in a press release. Mentioning construction and housing finance was necessary for the SBP, perhaps, to remain on the “same page” with the government trying to give the construction sector a boost. But as a matter of principle, the central bank actually wants the banking industry to minimize the asset-liability mismatch that banks create themselves and then use as an excuse for not making enough long-term loans.

Interest Rate 1.85% p.a. – 6.95% p.a.
Minimum Deposit Amount Rs.1,000
Investment Tenure 7 days to 10 years
Interest Compound Frequency Monthly, Quarterly, or Annually
Partial and Mid-term Withdrawal Allowed with Penalty

  1. Habib Bank Limited (HBL) …
  2. National Bank of Pakistan (NBP) …
  3. MCB Bank. …
  4. Meezan Bank. …
  5. United Bank Limited (UBL) …
  6. Allied Bank Limited. …
  7. Bank Al Habib. …
  8. Standard Chartered Bank.

Now we come to SMEs .Declared Profit Rates on Different Deposit Products –1st Half Year-2021 the definition of SMEs in Pakistan lies on the number of. employees up to 250 people, paid-up capital up to Rs.25 million and. annual sales up to Rs.250 millionThere are approximately 2 million Micro Small and Medium Enterprises in Pakistan. These include 400,000 manufacturing units, 600,000 Service sector units and 1 million Trade sector units (retailers).There profits run from 0% on current to 8.25% on fixed terms for 5 years

Microfinance is a banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. Microfinance allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices. While the microfinance sector consists of a diverse range of institutions, the products that they offer do not vary very significantly.  Mostly the sector offers a general loan or an agricultural loan of just under US$ 200 for a year.  The repayments begin more or less immediately and repayments are expected to be made generally on a weekly or bi-monthly basis.  The most common use of loans is for trade (31%), agriculture (24%), livestock (16%), and manufacturing (7%).   A few loan products like housing have recently been added by a few MFIs but still make up a small proportion of the loans.  . Product Profit Payout Tenure Profit Rate run from 4.41% to 11.77% on fixed deposit

Concluding Micro finance is better than any other category but their monitoring is weak in Pakistan

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