Journal of Bankers
Transcript of Journal of Bankers
7232019 Journal of Bankers
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MICRO SMALL amp
MEDIUM
ENTERPRISESan engine of growth amp prosperity
Economic Growth in Pakistan
Need for Vast Spread of ATMs
in Pakstan
Private Equity Investments
On the Horizon of Pakistanrsquos Financial
Landscape
Money Laundering amp Terrorist
Financing
AprilJune 2015 Volume 82 | Issue 2
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April and October
7232019 Journal of Bankers
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editorial
Sirajuddin AzizEditor-in-Chief
hat is an organizationrsquos reputation worth The answer is simple everything
The results of a study by the WorldEconomic Forum reveal that on average more than 25 percentof an organizationrsquos market value is a result of its reputation An organizationrsquos reputation is what determines its success When tarnished it is also what determines organizationalfailures
One of the greatest lessons that the banking industrylearned from the global financial crises of 2008 is that reputa-tional risk is as important as the more conventional bankingrisks such as market risk credit risk liquidity risk and opera-tional risk Post financial crises reputation and conduct riskshave emerged as high importance buzzwords on bankersrsquoradars
A reputation risk that is not timely and effectively managedcan escalate into a major strategic crisis at an alarmingly fastpace The cost of poor conduct is high not just in terms of
legal repercussions but also in terms of the reputationalerosion and the ensuing loss of business
As a consequence of the many financial scandals thatemerged during the financial crises banking regulatory authori-ties introduced stringent preventative regulation with particularfocus on ethical aspects of banking service delivery and opera-tions This paradigm shift towards increased regulation isenhancing banking vigilance controls and compliance Howev-er in some instances stricter regulation alone does not remedi-ally address the cause of improper unethical conduct
Simply put this popular buzzword lsquoconduct riskrsquo is the
reputational risk that the organization faces from its staff actingunprofessionally unethically or illegally It refers to risksattached to the way in which an organization and its staffconduct themselves - lsquobehaviorrsquo is the most important elementof conduct risk Due to its complexity conduct risk is not easilymanaged only by rules policies and procedures
Conduct risk emanates from ethically compromised corpo-rate culture and unethical behavior of employees ndash behaviorthat could cause malfunctioning of soundly architectedcontrols The ethics of the individual and the culture within theorganization are both significant influencers of an individualrsquosconduct
Conduct risk is manifest in different forms Conduct riskcan occur in the way clients are served and how well the respon-
sibilities of making profit for onersquos client and generatingprofitresult for the organization are balanced Another formof conduct risk is when employees engage in financial misde-meanors by assisting clients in acquiring financial assets that donot comply with the law Conflict of interest is another form ofmisconduct where personal interests of employees are not inline with the organizational or public interests Market abuse which entails incidents of market manipulation and insidertrading is another form of conduct risk
While it is very important to have the right rules and regula-tions in place their efficacy is compromised if behavioralelements do not complement these compliance directives Thisis why conduct risk needs to managed with caution and requiresthat organizations gauge their ethical culture with the rightmanagement inculcating the ethical culture down the corporateechelons stimulating compliance awareness and improving thecommitment to compliance goals Organizations thereforeneed to lay emphasis upon behavioral aspects and be able tomeasure them in order to proactively improve compliance
The process for mitigating conduct risk is more complexand difficult to define than those of the more technical risksthat the financial sector faces The managements of organiza-tions need to evaluate the companyrsquos values and objectives inorder to frame lsquocustomer outcomesrsquo that they need to deliverOnce these outcomes are defined the management shouldensure alignment of corporate strategy with these fair customeroutcomes The next step requires ensuring that organization-albusiness processes are optimized to deliver fair outcomes tocustomers This also means ensuring that a conducive culture isin place within the organization to facilitate employees toachieve the requisite results
A lsquorightrsquo corporate culture is one which puts customers andmarket integrity at the heart of the organizationrsquos business Thiscan be promoted by an ethically conscious management articu-lating its vision of ethical conduct into easily understoodbusiness practices and implementing these within the organiza-tion This should be followed byreinforcing desirable behaviorsthrough performance managementand rewards
A management team that focus-es upon organizational values whileremaining committed to delivering
fair value to customers can generatesustainable reputational benefits forthe organization
w
ldquoConduct Risk ndash The
New Buzz Word in Banking Regulationrdquo
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The Contributors contents
Journal of The Institute of Bankers Pakistan 3
COVER STORY 06
Cover Story
Micro Small amp MediumEnterprises An Engine of Growth amp
Prosperity
06
Global
Perspective
Why was Japan soUnsuccessful in SolvingDeflation Over the PastTwo Decades
08
Money Laundering amp Terrorist FinancingUnderstanding the Trends amp Typologies
12
Risk management andcash-related risksGeneral points An
analytical model
16
15
Economic Growth inPakistan
22
Need for Vast Spread of ATMs in Pakistan
26
Marketing at Banks28
Private EquityInvestments ndash On the
Horizon of Pakistanrsquos
Financial Landscape
32
Commercial BankingProblems amp Solutions
36
Banking
MICRO SMALL
amp MEDIUMENTERPRISESan engine of growth amp prosperi ty
Chartered Banker Professional Standerd Board
Dr Ayesha Noor is a PhD (Finance)
MS (Finance) MBA (Finance) MSC(Economics) and BCom qualifiedscholar
Dr S Sabir Ali Jaffery is MBA (IBA- Gold Medalist) MPhil (KASBIT -Gold Medalist) PhD (BusinessManagement) a veteran banker of morethan fifty years standing with interna-
tional exposure as Country General Manager and a versatile academic Professor teaching MBAs andMComs at different universities
Asif Ishaq is a Risk Management with over 7 years of work experi-ence He is an MSC (Intl Eco ampFinance) MBA (Finance) Bs(Com-puter Sceince) and JAIBP qualifiedexpert
Muhammad Subtain Raza is a freelancer associated with National Bankof Pakistan with expertise in credit and AML amp CFT practices Currently he is
focusing on AMLCFT measures incontext of Pakistan He is a Doctoral scholar withMBA (HRM) MSc (Hons) and Banking Junior Associateship from IBP
Helena Tejero is a business journalist
Mohammed Arifeen has a diverseexperience of 47 years in ResearchPlanning Forecasting TeachingHuman Resource Market Surveys etcHe is currently a Freelance Research
Content Writer on Banking Education Economicsand Business Matters He is MA Economics fromDhaka University
Ghalib Nishtar is the foundingpresident of KhushhalibankPakistanrsquos largest microfinancebank He has over 30 years ofmanagement experience commencing
with Bank of Ameri ca in 82rsquo and is the recipientSitara-i-Imtiaz one of Pakistanrsquos highest Presidential
civil awards
Zulfiqar Haider Bhatti is a MS(MPhil) Banking amp FinancialEconomics MCom AIBP Associateof Chartered Institute of Bankers andCIMA Advance Diploma in Manage-
ment Accounting qualified banker
Dr Salman Sheikh is currentlypursuing PhD in Economics and hasdone MS in Finance He is a knownauthor with 11 indexed research paperspublished in locally and abroad
journals along with more than 150 research articlespublished in more than two dozen different magazines worldwide
7232019 Journal of Bankers
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Published by The Institute of Bankers Pakistan
Moulvi Tamizuddin Khan Road
Karachi 74200 Pakistan
Tel +92 (21) 3568 0783
Fax +92 (21) 3568 3805wwwibporgpk
publicationsibporgpk
Editor-in-ChiefSirajuddin Aziz
Deputy Editor-in-ChiefRizwan Nizami
PublicationsFizza Rizvi
publicationsibporgpk
AdvertisingMuhammad Akram
+92 (21) 3562 1339 35277511
makramibporgpk
DesignJahangir Ishaq
Potential contributors are requested
to contact the Publications Manager
on the email address above or write to
IBP at its mailing address
Copyright
All rights reserved The material appearing
in this journal may not be reproduced in
any form without prior permission of The
Institute of Bankers Pakistan
General DisclaimerIBP Journal is based on contributions
from individuals and information
obtained from local and international
print and electronic media IBP has not
verified this information and no warranty
expressed or implied is made that such
information is accurate complete or
should be relied upon as such In no
circumstances IBP and its team members
would be liable for any incidental or
consequential damage that may occur
from the use of information contained in
IBP publication(s)
The Institute of
Bankers Pakistan
Humor and Quotes
40
Book Review
Standard Bearer 42
Contribution of Zakat inSocio - EconomicDevelopment in Pakistan
38
Islamic Banking
38
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MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
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According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
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The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
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actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
7232019 Journal of Bankers
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
7232019 Journal of Bankers
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 248
April and October
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 348 Journal of The Institute of Bankers Pakistan 1
editorial
Sirajuddin AzizEditor-in-Chief
hat is an organizationrsquos reputation worth The answer is simple everything
The results of a study by the WorldEconomic Forum reveal that on average more than 25 percentof an organizationrsquos market value is a result of its reputation An organizationrsquos reputation is what determines its success When tarnished it is also what determines organizationalfailures
One of the greatest lessons that the banking industrylearned from the global financial crises of 2008 is that reputa-tional risk is as important as the more conventional bankingrisks such as market risk credit risk liquidity risk and opera-tional risk Post financial crises reputation and conduct riskshave emerged as high importance buzzwords on bankersrsquoradars
A reputation risk that is not timely and effectively managedcan escalate into a major strategic crisis at an alarmingly fastpace The cost of poor conduct is high not just in terms of
legal repercussions but also in terms of the reputationalerosion and the ensuing loss of business
As a consequence of the many financial scandals thatemerged during the financial crises banking regulatory authori-ties introduced stringent preventative regulation with particularfocus on ethical aspects of banking service delivery and opera-tions This paradigm shift towards increased regulation isenhancing banking vigilance controls and compliance Howev-er in some instances stricter regulation alone does not remedi-ally address the cause of improper unethical conduct
Simply put this popular buzzword lsquoconduct riskrsquo is the
reputational risk that the organization faces from its staff actingunprofessionally unethically or illegally It refers to risksattached to the way in which an organization and its staffconduct themselves - lsquobehaviorrsquo is the most important elementof conduct risk Due to its complexity conduct risk is not easilymanaged only by rules policies and procedures
Conduct risk emanates from ethically compromised corpo-rate culture and unethical behavior of employees ndash behaviorthat could cause malfunctioning of soundly architectedcontrols The ethics of the individual and the culture within theorganization are both significant influencers of an individualrsquosconduct
Conduct risk is manifest in different forms Conduct riskcan occur in the way clients are served and how well the respon-
sibilities of making profit for onersquos client and generatingprofitresult for the organization are balanced Another formof conduct risk is when employees engage in financial misde-meanors by assisting clients in acquiring financial assets that donot comply with the law Conflict of interest is another form ofmisconduct where personal interests of employees are not inline with the organizational or public interests Market abuse which entails incidents of market manipulation and insidertrading is another form of conduct risk
While it is very important to have the right rules and regula-tions in place their efficacy is compromised if behavioralelements do not complement these compliance directives Thisis why conduct risk needs to managed with caution and requiresthat organizations gauge their ethical culture with the rightmanagement inculcating the ethical culture down the corporateechelons stimulating compliance awareness and improving thecommitment to compliance goals Organizations thereforeneed to lay emphasis upon behavioral aspects and be able tomeasure them in order to proactively improve compliance
The process for mitigating conduct risk is more complexand difficult to define than those of the more technical risksthat the financial sector faces The managements of organiza-tions need to evaluate the companyrsquos values and objectives inorder to frame lsquocustomer outcomesrsquo that they need to deliverOnce these outcomes are defined the management shouldensure alignment of corporate strategy with these fair customeroutcomes The next step requires ensuring that organization-albusiness processes are optimized to deliver fair outcomes tocustomers This also means ensuring that a conducive culture isin place within the organization to facilitate employees toachieve the requisite results
A lsquorightrsquo corporate culture is one which puts customers andmarket integrity at the heart of the organizationrsquos business Thiscan be promoted by an ethically conscious management articu-lating its vision of ethical conduct into easily understoodbusiness practices and implementing these within the organiza-tion This should be followed byreinforcing desirable behaviorsthrough performance managementand rewards
A management team that focus-es upon organizational values whileremaining committed to delivering
fair value to customers can generatesustainable reputational benefits forthe organization
w
ldquoConduct Risk ndash The
New Buzz Word in Banking Regulationrdquo
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 448
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 548
$
euro
PKRpound
The Contributors contents
Journal of The Institute of Bankers Pakistan 3
COVER STORY 06
Cover Story
Micro Small amp MediumEnterprises An Engine of Growth amp
Prosperity
06
Global
Perspective
Why was Japan soUnsuccessful in SolvingDeflation Over the PastTwo Decades
08
Money Laundering amp Terrorist FinancingUnderstanding the Trends amp Typologies
12
Risk management andcash-related risksGeneral points An
analytical model
16
15
Economic Growth inPakistan
22
Need for Vast Spread of ATMs in Pakistan
26
Marketing at Banks28
Private EquityInvestments ndash On the
Horizon of Pakistanrsquos
Financial Landscape
32
Commercial BankingProblems amp Solutions
36
Banking
MICRO SMALL
amp MEDIUMENTERPRISESan engine of growth amp prosperi ty
Chartered Banker Professional Standerd Board
Dr Ayesha Noor is a PhD (Finance)
MS (Finance) MBA (Finance) MSC(Economics) and BCom qualifiedscholar
Dr S Sabir Ali Jaffery is MBA (IBA- Gold Medalist) MPhil (KASBIT -Gold Medalist) PhD (BusinessManagement) a veteran banker of morethan fifty years standing with interna-
tional exposure as Country General Manager and a versatile academic Professor teaching MBAs andMComs at different universities
Asif Ishaq is a Risk Management with over 7 years of work experi-ence He is an MSC (Intl Eco ampFinance) MBA (Finance) Bs(Com-puter Sceince) and JAIBP qualifiedexpert
Muhammad Subtain Raza is a freelancer associated with National Bankof Pakistan with expertise in credit and AML amp CFT practices Currently he is
focusing on AMLCFT measures incontext of Pakistan He is a Doctoral scholar withMBA (HRM) MSc (Hons) and Banking Junior Associateship from IBP
Helena Tejero is a business journalist
Mohammed Arifeen has a diverseexperience of 47 years in ResearchPlanning Forecasting TeachingHuman Resource Market Surveys etcHe is currently a Freelance Research
Content Writer on Banking Education Economicsand Business Matters He is MA Economics fromDhaka University
Ghalib Nishtar is the foundingpresident of KhushhalibankPakistanrsquos largest microfinancebank He has over 30 years ofmanagement experience commencing
with Bank of Ameri ca in 82rsquo and is the recipientSitara-i-Imtiaz one of Pakistanrsquos highest Presidential
civil awards
Zulfiqar Haider Bhatti is a MS(MPhil) Banking amp FinancialEconomics MCom AIBP Associateof Chartered Institute of Bankers andCIMA Advance Diploma in Manage-
ment Accounting qualified banker
Dr Salman Sheikh is currentlypursuing PhD in Economics and hasdone MS in Finance He is a knownauthor with 11 indexed research paperspublished in locally and abroad
journals along with more than 150 research articlespublished in more than two dozen different magazines worldwide
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 648 Journal of The Institute of Bankers Pakistan4
Published by The Institute of Bankers Pakistan
Moulvi Tamizuddin Khan Road
Karachi 74200 Pakistan
Tel +92 (21) 3568 0783
Fax +92 (21) 3568 3805wwwibporgpk
publicationsibporgpk
Editor-in-ChiefSirajuddin Aziz
Deputy Editor-in-ChiefRizwan Nizami
PublicationsFizza Rizvi
publicationsibporgpk
AdvertisingMuhammad Akram
+92 (21) 3562 1339 35277511
makramibporgpk
DesignJahangir Ishaq
Potential contributors are requested
to contact the Publications Manager
on the email address above or write to
IBP at its mailing address
Copyright
All rights reserved The material appearing
in this journal may not be reproduced in
any form without prior permission of The
Institute of Bankers Pakistan
General DisclaimerIBP Journal is based on contributions
from individuals and information
obtained from local and international
print and electronic media IBP has not
verified this information and no warranty
expressed or implied is made that such
information is accurate complete or
should be relied upon as such In no
circumstances IBP and its team members
would be liable for any incidental or
consequential damage that may occur
from the use of information contained in
IBP publication(s)
The Institute of
Bankers Pakistan
Humor and Quotes
40
Book Review
Standard Bearer 42
Contribution of Zakat inSocio - EconomicDevelopment in Pakistan
38
Islamic Banking
38
7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 848
$
euro
poundPKR
MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 948
According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1048
The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1248
actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1348
From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1448
MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
7232019 Journal of Bankers
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1948
lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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7232019 Journal of Bankers
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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7232019 Journal of Bankers
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 348 Journal of The Institute of Bankers Pakistan 1
editorial
Sirajuddin AzizEditor-in-Chief
hat is an organizationrsquos reputation worth The answer is simple everything
The results of a study by the WorldEconomic Forum reveal that on average more than 25 percentof an organizationrsquos market value is a result of its reputation An organizationrsquos reputation is what determines its success When tarnished it is also what determines organizationalfailures
One of the greatest lessons that the banking industrylearned from the global financial crises of 2008 is that reputa-tional risk is as important as the more conventional bankingrisks such as market risk credit risk liquidity risk and opera-tional risk Post financial crises reputation and conduct riskshave emerged as high importance buzzwords on bankersrsquoradars
A reputation risk that is not timely and effectively managedcan escalate into a major strategic crisis at an alarmingly fastpace The cost of poor conduct is high not just in terms of
legal repercussions but also in terms of the reputationalerosion and the ensuing loss of business
As a consequence of the many financial scandals thatemerged during the financial crises banking regulatory authori-ties introduced stringent preventative regulation with particularfocus on ethical aspects of banking service delivery and opera-tions This paradigm shift towards increased regulation isenhancing banking vigilance controls and compliance Howev-er in some instances stricter regulation alone does not remedi-ally address the cause of improper unethical conduct
Simply put this popular buzzword lsquoconduct riskrsquo is the
reputational risk that the organization faces from its staff actingunprofessionally unethically or illegally It refers to risksattached to the way in which an organization and its staffconduct themselves - lsquobehaviorrsquo is the most important elementof conduct risk Due to its complexity conduct risk is not easilymanaged only by rules policies and procedures
Conduct risk emanates from ethically compromised corpo-rate culture and unethical behavior of employees ndash behaviorthat could cause malfunctioning of soundly architectedcontrols The ethics of the individual and the culture within theorganization are both significant influencers of an individualrsquosconduct
Conduct risk is manifest in different forms Conduct riskcan occur in the way clients are served and how well the respon-
sibilities of making profit for onersquos client and generatingprofitresult for the organization are balanced Another formof conduct risk is when employees engage in financial misde-meanors by assisting clients in acquiring financial assets that donot comply with the law Conflict of interest is another form ofmisconduct where personal interests of employees are not inline with the organizational or public interests Market abuse which entails incidents of market manipulation and insidertrading is another form of conduct risk
While it is very important to have the right rules and regula-tions in place their efficacy is compromised if behavioralelements do not complement these compliance directives Thisis why conduct risk needs to managed with caution and requiresthat organizations gauge their ethical culture with the rightmanagement inculcating the ethical culture down the corporateechelons stimulating compliance awareness and improving thecommitment to compliance goals Organizations thereforeneed to lay emphasis upon behavioral aspects and be able tomeasure them in order to proactively improve compliance
The process for mitigating conduct risk is more complexand difficult to define than those of the more technical risksthat the financial sector faces The managements of organiza-tions need to evaluate the companyrsquos values and objectives inorder to frame lsquocustomer outcomesrsquo that they need to deliverOnce these outcomes are defined the management shouldensure alignment of corporate strategy with these fair customeroutcomes The next step requires ensuring that organization-albusiness processes are optimized to deliver fair outcomes tocustomers This also means ensuring that a conducive culture isin place within the organization to facilitate employees toachieve the requisite results
A lsquorightrsquo corporate culture is one which puts customers andmarket integrity at the heart of the organizationrsquos business Thiscan be promoted by an ethically conscious management articu-lating its vision of ethical conduct into easily understoodbusiness practices and implementing these within the organiza-tion This should be followed byreinforcing desirable behaviorsthrough performance managementand rewards
A management team that focus-es upon organizational values whileremaining committed to delivering
fair value to customers can generatesustainable reputational benefits forthe organization
w
ldquoConduct Risk ndash The
New Buzz Word in Banking Regulationrdquo
7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 548
$
euro
PKRpound
The Contributors contents
Journal of The Institute of Bankers Pakistan 3
COVER STORY 06
Cover Story
Micro Small amp MediumEnterprises An Engine of Growth amp
Prosperity
06
Global
Perspective
Why was Japan soUnsuccessful in SolvingDeflation Over the PastTwo Decades
08
Money Laundering amp Terrorist FinancingUnderstanding the Trends amp Typologies
12
Risk management andcash-related risksGeneral points An
analytical model
16
15
Economic Growth inPakistan
22
Need for Vast Spread of ATMs in Pakistan
26
Marketing at Banks28
Private EquityInvestments ndash On the
Horizon of Pakistanrsquos
Financial Landscape
32
Commercial BankingProblems amp Solutions
36
Banking
MICRO SMALL
amp MEDIUMENTERPRISESan engine of growth amp prosperi ty
Chartered Banker Professional Standerd Board
Dr Ayesha Noor is a PhD (Finance)
MS (Finance) MBA (Finance) MSC(Economics) and BCom qualifiedscholar
Dr S Sabir Ali Jaffery is MBA (IBA- Gold Medalist) MPhil (KASBIT -Gold Medalist) PhD (BusinessManagement) a veteran banker of morethan fifty years standing with interna-
tional exposure as Country General Manager and a versatile academic Professor teaching MBAs andMComs at different universities
Asif Ishaq is a Risk Management with over 7 years of work experi-ence He is an MSC (Intl Eco ampFinance) MBA (Finance) Bs(Com-puter Sceince) and JAIBP qualifiedexpert
Muhammad Subtain Raza is a freelancer associated with National Bankof Pakistan with expertise in credit and AML amp CFT practices Currently he is
focusing on AMLCFT measures incontext of Pakistan He is a Doctoral scholar withMBA (HRM) MSc (Hons) and Banking Junior Associateship from IBP
Helena Tejero is a business journalist
Mohammed Arifeen has a diverseexperience of 47 years in ResearchPlanning Forecasting TeachingHuman Resource Market Surveys etcHe is currently a Freelance Research
Content Writer on Banking Education Economicsand Business Matters He is MA Economics fromDhaka University
Ghalib Nishtar is the foundingpresident of KhushhalibankPakistanrsquos largest microfinancebank He has over 30 years ofmanagement experience commencing
with Bank of Ameri ca in 82rsquo and is the recipientSitara-i-Imtiaz one of Pakistanrsquos highest Presidential
civil awards
Zulfiqar Haider Bhatti is a MS(MPhil) Banking amp FinancialEconomics MCom AIBP Associateof Chartered Institute of Bankers andCIMA Advance Diploma in Manage-
ment Accounting qualified banker
Dr Salman Sheikh is currentlypursuing PhD in Economics and hasdone MS in Finance He is a knownauthor with 11 indexed research paperspublished in locally and abroad
journals along with more than 150 research articlespublished in more than two dozen different magazines worldwide
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 648 Journal of The Institute of Bankers Pakistan4
Published by The Institute of Bankers Pakistan
Moulvi Tamizuddin Khan Road
Karachi 74200 Pakistan
Tel +92 (21) 3568 0783
Fax +92 (21) 3568 3805wwwibporgpk
publicationsibporgpk
Editor-in-ChiefSirajuddin Aziz
Deputy Editor-in-ChiefRizwan Nizami
PublicationsFizza Rizvi
publicationsibporgpk
AdvertisingMuhammad Akram
+92 (21) 3562 1339 35277511
makramibporgpk
DesignJahangir Ishaq
Potential contributors are requested
to contact the Publications Manager
on the email address above or write to
IBP at its mailing address
Copyright
All rights reserved The material appearing
in this journal may not be reproduced in
any form without prior permission of The
Institute of Bankers Pakistan
General DisclaimerIBP Journal is based on contributions
from individuals and information
obtained from local and international
print and electronic media IBP has not
verified this information and no warranty
expressed or implied is made that such
information is accurate complete or
should be relied upon as such In no
circumstances IBP and its team members
would be liable for any incidental or
consequential damage that may occur
from the use of information contained in
IBP publication(s)
The Institute of
Bankers Pakistan
Humor and Quotes
40
Book Review
Standard Bearer 42
Contribution of Zakat inSocio - EconomicDevelopment in Pakistan
38
Islamic Banking
38
7232019 Journal of Bankers
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7232019 Journal of Bankers
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$
euro
poundPKR
MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
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According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
7232019 Journal of Bankers
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The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
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actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1948
lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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7232019 Journal of Bankers
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 2548
n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 448
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 548
$
euro
PKRpound
The Contributors contents
Journal of The Institute of Bankers Pakistan 3
COVER STORY 06
Cover Story
Micro Small amp MediumEnterprises An Engine of Growth amp
Prosperity
06
Global
Perspective
Why was Japan soUnsuccessful in SolvingDeflation Over the PastTwo Decades
08
Money Laundering amp Terrorist FinancingUnderstanding the Trends amp Typologies
12
Risk management andcash-related risksGeneral points An
analytical model
16
15
Economic Growth inPakistan
22
Need for Vast Spread of ATMs in Pakistan
26
Marketing at Banks28
Private EquityInvestments ndash On the
Horizon of Pakistanrsquos
Financial Landscape
32
Commercial BankingProblems amp Solutions
36
Banking
MICRO SMALL
amp MEDIUMENTERPRISESan engine of growth amp prosperi ty
Chartered Banker Professional Standerd Board
Dr Ayesha Noor is a PhD (Finance)
MS (Finance) MBA (Finance) MSC(Economics) and BCom qualifiedscholar
Dr S Sabir Ali Jaffery is MBA (IBA- Gold Medalist) MPhil (KASBIT -Gold Medalist) PhD (BusinessManagement) a veteran banker of morethan fifty years standing with interna-
tional exposure as Country General Manager and a versatile academic Professor teaching MBAs andMComs at different universities
Asif Ishaq is a Risk Management with over 7 years of work experi-ence He is an MSC (Intl Eco ampFinance) MBA (Finance) Bs(Com-puter Sceince) and JAIBP qualifiedexpert
Muhammad Subtain Raza is a freelancer associated with National Bankof Pakistan with expertise in credit and AML amp CFT practices Currently he is
focusing on AMLCFT measures incontext of Pakistan He is a Doctoral scholar withMBA (HRM) MSc (Hons) and Banking Junior Associateship from IBP
Helena Tejero is a business journalist
Mohammed Arifeen has a diverseexperience of 47 years in ResearchPlanning Forecasting TeachingHuman Resource Market Surveys etcHe is currently a Freelance Research
Content Writer on Banking Education Economicsand Business Matters He is MA Economics fromDhaka University
Ghalib Nishtar is the foundingpresident of KhushhalibankPakistanrsquos largest microfinancebank He has over 30 years ofmanagement experience commencing
with Bank of Ameri ca in 82rsquo and is the recipientSitara-i-Imtiaz one of Pakistanrsquos highest Presidential
civil awards
Zulfiqar Haider Bhatti is a MS(MPhil) Banking amp FinancialEconomics MCom AIBP Associateof Chartered Institute of Bankers andCIMA Advance Diploma in Manage-
ment Accounting qualified banker
Dr Salman Sheikh is currentlypursuing PhD in Economics and hasdone MS in Finance He is a knownauthor with 11 indexed research paperspublished in locally and abroad
journals along with more than 150 research articlespublished in more than two dozen different magazines worldwide
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 648 Journal of The Institute of Bankers Pakistan4
Published by The Institute of Bankers Pakistan
Moulvi Tamizuddin Khan Road
Karachi 74200 Pakistan
Tel +92 (21) 3568 0783
Fax +92 (21) 3568 3805wwwibporgpk
publicationsibporgpk
Editor-in-ChiefSirajuddin Aziz
Deputy Editor-in-ChiefRizwan Nizami
PublicationsFizza Rizvi
publicationsibporgpk
AdvertisingMuhammad Akram
+92 (21) 3562 1339 35277511
makramibporgpk
DesignJahangir Ishaq
Potential contributors are requested
to contact the Publications Manager
on the email address above or write to
IBP at its mailing address
Copyright
All rights reserved The material appearing
in this journal may not be reproduced in
any form without prior permission of The
Institute of Bankers Pakistan
General DisclaimerIBP Journal is based on contributions
from individuals and information
obtained from local and international
print and electronic media IBP has not
verified this information and no warranty
expressed or implied is made that such
information is accurate complete or
should be relied upon as such In no
circumstances IBP and its team members
would be liable for any incidental or
consequential damage that may occur
from the use of information contained in
IBP publication(s)
The Institute of
Bankers Pakistan
Humor and Quotes
40
Book Review
Standard Bearer 42
Contribution of Zakat inSocio - EconomicDevelopment in Pakistan
38
Islamic Banking
38
7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 848
$
euro
poundPKR
MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 948
According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
7232019 Journal of Bankers
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The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1248
actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1948
lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
7232019 Journal of Bankers
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 548
$
euro
PKRpound
The Contributors contents
Journal of The Institute of Bankers Pakistan 3
COVER STORY 06
Cover Story
Micro Small amp MediumEnterprises An Engine of Growth amp
Prosperity
06
Global
Perspective
Why was Japan soUnsuccessful in SolvingDeflation Over the PastTwo Decades
08
Money Laundering amp Terrorist FinancingUnderstanding the Trends amp Typologies
12
Risk management andcash-related risksGeneral points An
analytical model
16
15
Economic Growth inPakistan
22
Need for Vast Spread of ATMs in Pakistan
26
Marketing at Banks28
Private EquityInvestments ndash On the
Horizon of Pakistanrsquos
Financial Landscape
32
Commercial BankingProblems amp Solutions
36
Banking
MICRO SMALL
amp MEDIUMENTERPRISESan engine of growth amp prosperi ty
Chartered Banker Professional Standerd Board
Dr Ayesha Noor is a PhD (Finance)
MS (Finance) MBA (Finance) MSC(Economics) and BCom qualifiedscholar
Dr S Sabir Ali Jaffery is MBA (IBA- Gold Medalist) MPhil (KASBIT -Gold Medalist) PhD (BusinessManagement) a veteran banker of morethan fifty years standing with interna-
tional exposure as Country General Manager and a versatile academic Professor teaching MBAs andMComs at different universities
Asif Ishaq is a Risk Management with over 7 years of work experi-ence He is an MSC (Intl Eco ampFinance) MBA (Finance) Bs(Com-puter Sceince) and JAIBP qualifiedexpert
Muhammad Subtain Raza is a freelancer associated with National Bankof Pakistan with expertise in credit and AML amp CFT practices Currently he is
focusing on AMLCFT measures incontext of Pakistan He is a Doctoral scholar withMBA (HRM) MSc (Hons) and Banking Junior Associateship from IBP
Helena Tejero is a business journalist
Mohammed Arifeen has a diverseexperience of 47 years in ResearchPlanning Forecasting TeachingHuman Resource Market Surveys etcHe is currently a Freelance Research
Content Writer on Banking Education Economicsand Business Matters He is MA Economics fromDhaka University
Ghalib Nishtar is the foundingpresident of KhushhalibankPakistanrsquos largest microfinancebank He has over 30 years ofmanagement experience commencing
with Bank of Ameri ca in 82rsquo and is the recipientSitara-i-Imtiaz one of Pakistanrsquos highest Presidential
civil awards
Zulfiqar Haider Bhatti is a MS(MPhil) Banking amp FinancialEconomics MCom AIBP Associateof Chartered Institute of Bankers andCIMA Advance Diploma in Manage-
ment Accounting qualified banker
Dr Salman Sheikh is currentlypursuing PhD in Economics and hasdone MS in Finance He is a knownauthor with 11 indexed research paperspublished in locally and abroad
journals along with more than 150 research articlespublished in more than two dozen different magazines worldwide
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 648 Journal of The Institute of Bankers Pakistan4
Published by The Institute of Bankers Pakistan
Moulvi Tamizuddin Khan Road
Karachi 74200 Pakistan
Tel +92 (21) 3568 0783
Fax +92 (21) 3568 3805wwwibporgpk
publicationsibporgpk
Editor-in-ChiefSirajuddin Aziz
Deputy Editor-in-ChiefRizwan Nizami
PublicationsFizza Rizvi
publicationsibporgpk
AdvertisingMuhammad Akram
+92 (21) 3562 1339 35277511
makramibporgpk
DesignJahangir Ishaq
Potential contributors are requested
to contact the Publications Manager
on the email address above or write to
IBP at its mailing address
Copyright
All rights reserved The material appearing
in this journal may not be reproduced in
any form without prior permission of The
Institute of Bankers Pakistan
General DisclaimerIBP Journal is based on contributions
from individuals and information
obtained from local and international
print and electronic media IBP has not
verified this information and no warranty
expressed or implied is made that such
information is accurate complete or
should be relied upon as such In no
circumstances IBP and its team members
would be liable for any incidental or
consequential damage that may occur
from the use of information contained in
IBP publication(s)
The Institute of
Bankers Pakistan
Humor and Quotes
40
Book Review
Standard Bearer 42
Contribution of Zakat inSocio - EconomicDevelopment in Pakistan
38
Islamic Banking
38
7232019 Journal of Bankers
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7232019 Journal of Bankers
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$
euro
poundPKR
MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 948
According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
7232019 Journal of Bankers
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The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1248
actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 2048
of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
7232019 Journal of Bankers
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 648 Journal of The Institute of Bankers Pakistan4
Published by The Institute of Bankers Pakistan
Moulvi Tamizuddin Khan Road
Karachi 74200 Pakistan
Tel +92 (21) 3568 0783
Fax +92 (21) 3568 3805wwwibporgpk
publicationsibporgpk
Editor-in-ChiefSirajuddin Aziz
Deputy Editor-in-ChiefRizwan Nizami
PublicationsFizza Rizvi
publicationsibporgpk
AdvertisingMuhammad Akram
+92 (21) 3562 1339 35277511
makramibporgpk
DesignJahangir Ishaq
Potential contributors are requested
to contact the Publications Manager
on the email address above or write to
IBP at its mailing address
Copyright
All rights reserved The material appearing
in this journal may not be reproduced in
any form without prior permission of The
Institute of Bankers Pakistan
General DisclaimerIBP Journal is based on contributions
from individuals and information
obtained from local and international
print and electronic media IBP has not
verified this information and no warranty
expressed or implied is made that such
information is accurate complete or
should be relied upon as such In no
circumstances IBP and its team members
would be liable for any incidental or
consequential damage that may occur
from the use of information contained in
IBP publication(s)
The Institute of
Bankers Pakistan
Humor and Quotes
40
Book Review
Standard Bearer 42
Contribution of Zakat inSocio - EconomicDevelopment in Pakistan
38
Islamic Banking
38
7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 848
$
euro
poundPKR
MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
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According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1048
The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1248
actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1948
lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 2048
of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
7232019 Journal of Bankers
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 848
$
euro
poundPKR
MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 948
According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1048
The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1248
actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1948
lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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7232019 Journal of Bankers
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 2548
n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 848
$
euro
poundPKR
MICRO SMALL amp
MEDIUM ENTERPRISESan engine of growth amp prosperi ty
Micro Small and Medium Enterprises (MSMErsquos) account for 997 of
al l enterprises in the world MSMErsquos have a signif icant role to play in
boosting the economic growth poverty reduction and social inclusion
across the globe
By M Ghalib Nishtar
COVER STORY
Journal of The Institute of Bankers Pakistan6
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 948
According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1048
The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1248
actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1348
From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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7232019 Journal of Bankers
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 2548
n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
7232019 Journal of Bankers
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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According to a
World Bank study
MSMErsquos in Pakistan
account for 30 of
GDP and contrib-
ute to 25 of
export earnings
SMErsquos are labor intensivegenerating jobs therebyincreasing the lsquolsquoreal incomeand standard of living of
many people In this way they canincrease the social and economic partici- pation of women youth and minoritiesrdquoMSMErsquos employ 78 of the labor force in
low income countries and 66 of thelabor force in high income countriesMSMErsquos act as a lsquouseful bridge headbetween the informal economy of familyenterprise and the formalized corporatesectorrsquo
All over the world half to two-thirdof all businesses are MSMErsquos and in manyregions this proportion is much higherMSMErsquos are capable of creating jobs withleast amount of capital and in dispersed
locations which makes MSMErsquos attractiveto policy makers However they remain asa heterogeneous group in different organ-izational structure ranging from proprie-torship to corporate engages in factoriesto service organizational activities and with various definitions in differentcountries and in some countries theydiffer from industry to industry
e heterogeneous nature and smallsize needs adequate support from organ-ized intermediaries ese intermediaries
exist in every country in different formsInternational Finance Corporation (IFC)in 2010 revealed that an estimated50-60 of MSMErsquos on a global level areeither under-served or completelyun-served
Financial institutions globally areconsidering MSME sector as an opportu-nity to capitalize and earn significantreturn on investment (ROI) Specificallyin the emerging markets the banksfinan-
cial institutions are looking to tap theun-served needs in this sector Banksaround the world are looking to emergingmarkets for new growth opportunities
For example in a recent publicatione State of Global Banking - In Searchof Sustainable Model according toMckinsey estimated that 60 of globalbanking revenue growth from 2010 to2020 will come from emerging markets Within emerging markets MSME isunder served segment e analysis shows
that formal MSMErsquos are more common inhigh ndashincome economies but in low andmiddle ndashincome economies MSMEdensity is rising at a faster pace eopportunity for banks to serve MSMErsquosin emerging markets is large In 2010banking revenue from MSMErsquos in emerg-ing markets totaled $150 billion or onesixth of all emerging market bankingrevenues By 2015 it is estimated thisfigure will grow by around 20 percent perannum to approximately $367 billion
According to a World Bank studyMSMErsquos in Pakistan account for 30 ofGDP and contribute to 25 of exportearnings According to Gallup survey in2004 MSME in Pakistan employed 80of the non-agriculture labor force As thesector moves towards achieving growthand sustainability through greater market
segmentation and product diversificationenterprise lending has become an increas-ingly important opportunity for microfi-nance providers (MFPrsquos)
e MSME sector of Pakistan isheterogeneous dispersed and mostlyunorganized It includes diverse types of production units ranging from tradition-al cras to highndashtech industries MSMErsquosin Pakistan account for 98 of alleconomic establishments According toestimates there are 38 million MSMErsquos
in Pakistan ese MSMErsquos are concen-trated in the trade services and manufac-turing sectors
IFCs data shows that in Pakistan themicro-enterprises consist of 99 of totalMSMErsquos Unlike SMEs which operatesmostly in manufacturing and servicessectors micro-enterprises are involved primarily in trade-related business Withmicro enterprises residing at pyramidsbase microfinance providers are well
placed to meet their funding needs
While mainstreaming MSMErsquos tooperate at optimal levels will requiredeveloping a conducing eco-system butaccess to finance remains a key sector
Since this segment of the marketholds great promise for the countryUnited States Agency for InternationalDevelopment (USAID) Pakistan hasinked an 8 year tenure US-PakistanPartnership for Access to Credit Agree-
ment with Khushhali Bank to provideaccess to formal financing facilities forMSMEs and facilitate broad-basedeconomic growth e dominant aim isto encourage lending to small andmedium enterprises (SMEs) in PakistanOf the $60 million $121 million isreserved for the private education sectoris partnership will serve to stimulatetargeted domestic commercially viableinvestments by mitigating some of thecredit risk factors that prevent access to
credit by small businesses across thecountry e partnership will supportinclusive growth and employment acrossall sectors
Journal of The Institute of Bankers Pakistan 7
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The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
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actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1348
From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
7232019 Journal of Bankers
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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7232019 Journal of Bankers
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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7232019 Journal of Bankers
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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The term lost decade refers to the idle period of Japanese economy where the economic flow became
stagnant for more than 10 years From 1993 to 2003 the average growth rate was recorded at just
above 1 The inflation rate in terms of GDP deflator or Consumer Price Index (CPI) had been negative
since 1998 Till the end of 2003 the CPI price level was brought down to 3 by deflation which is
even below than that during the 1997 level whereas in the same period there was an increase of 12
in the United States CPI index From 1997 to 2002 because of deflation along with virtually zero growth
the nominal GDP of Japan reduced by almost 4 whereas during the same time period United States
witnessed an increase of 25 in the nominal GDP There were several problems that had been high-
lighted as contributing factors in explaining Japanrsquos ldquolost decaderdquo
By Asif Ishaq
Journal of The Institute of Bankers Pakistan8
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1148
he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
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actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
7232019 Journal of Bankers
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
7232019 Journal of Bankers
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
7232019 Journal of Bankers
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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he poor outcome in the earlystage of Japanese stagflation hasbeen linked with the problemsthat occurred due to thenon-performing loans and the
asset burst bubble By the end of 2003 thestock index and the land prices dropped
by one-third of their high prices that wererecorded in 1989-1991e banking crisisof 1997-1998 was a result of the non-per-forming loan problem and the slow policyresponses e increment in the consump-tion tax rate and the April 1997rsquos withdrawal of income tax cut is cited as amistake of the fiscal policy which hasbrought the economy in trouble
From 1985 to 1990 it was quite clearthat Japans economy was experiencing a
bubble e land prices and stock pricesindex grew very sharply from 1983 to1989 Nikkei 225 rose from ten thousandin 1983 to forty thousand in 1989Growth rate of economy was reaching 5compared to the average growth rate of4 from 1975 to 1989 During thisbubble period CPI inflation was low
whereas asset prices gota l m o s tt r i p l e d
within few years In 1989 themonetary policy was finally tightenedDiscount rates increased from 25 to325 in May 1989 and then further to425 in December In August 1990 itrose to 6 representing a 350 basis pointincrease in 15 months Regulatory
tightening along with this hike in theinterest rates was also applied forstopping the increasing land priceslimiting the bank landing to real estate projects along with increasing taxes on thecapital gain from investing in land In1990 the stock prices started droppingfrom the very first trading day Till thesummer of 1992 the index had lostaround 60 of its peak level Land pricesalso started trembling in 1991 ebubble was finally busted
From 1992 to 95 Non PerformingLoans (NPLs) problem started getting worse Construction and real estatecompanies were having problems in paying interest on loans as they werebecoming bankrupt e banks in thehope of real estate market rebound-ing soon kept on lending to thecompanies that were not able toservice their debts e banking
problems worsened as no serious measures were taken to address this issue e Japanese economy severely struck withbalance sheet recession and was triggeredby a collapse in land and stock pricescausing the Japanese firms to have negativeequity (Companies assets were worth less
than their liabilities) e authoritiesfailed to deal with the actual causes forthis downfall rather focused on tacklingthe symptoms
In April 1998 when the newlyindependent bank of Japan started itsoperations with new governor and boardmembers hopes were high for positiveoutcomes However aer 5 years thebank not only lost its credibility but alsosuffered loss of confidence e economic
conditions were misjudged by the policyboard members also the governor andfellow board members refused to co-oper-ate with the government and took anindependent view whereas cooperation was seriously required in these times of prevailing economic situations Sincei n d e - pendence and earlyestab- lishment of credibil-i t y were consideredim- portant policy
From 1985 to 1990 it was
quite clear that Japans economy
was experiencing a bubblerdquo
Journal of The Institute of Bankers Pakistan 9
7232019 Journal of Bankers
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actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
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tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 2048
of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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actions became conservative tentativeand lacked boldness and self confidencee restructuring also failed
In February 1999 the zero interestrate policy (ZIRP) got introduced it waslikely to continue as long as the ldquodeflation-
ary concern was dispelledrdquo Unfortunatelyin August 2000 the policy got liedHowever in March 2001 it gotintroduced once again and was to contin-ue till ldquothe inflation rate became stablyabove zerordquo
In October 2003 the conditions wereelaborated even further at this point thenecessary condition in order to get out ofZIRP was that the rate of CPI inflationshould either be zero or above for some
time for a few months or so amp there wasno forecast which would show that theeconomy would fall back to deflationKnowing the fact that at the time whenZIRP got terminated economy was stillsuffering from deflation and that theZIRP had to be re-instated the interestrate hike of August 2000 was clearly amistake Also BOJ lowered the interestrates too little and too late (1991 to1995)
Aer the failure of Zero interest rate policy uantitative easing wasintroduced and from March 2001 to 2006and it was expanded in several steps ldquoInAugust 2001 the amount of BOJ outright purchases of long-term government bonds was raised from 400 billion yen per monthto 600 billion yen per month
At the same time the current accounttarget was raised to 6 trillion yen (or about2 trillion yen excess reserves) which wasfurther increased to 800 billion yen in
December 2001 1 trillion in Feb 2002and then to 12 Trillion in October 2002e current account target was also raisedto 10ndash15 trillion yenrdquo
Although quantitative easing gotexpanded by these steps where theamount for long-term bonds in October2002 stood at 12 trillion from 400 billion yen per month in September 2001deflation became worse indicating thatquantitative easing did not work and it
failed as well e main reason for itsfailure was that when the money supply was increased by the regulatory authori-ties they were of the opinion that this act
will be amplified by the banks and they will start extending loans to corporate andthe other sectors of the economy but thatdid not happen Instead of supporting thestep taken by the regulatory authority thebanks maintained their conservativeapproach towards extending loans and
advances
In order to overcome deflation along with promoting an independent centralbank Inflation targeting was also proposed However the inflation target-ing was opposed by Bank of Japan eeconomists in the Bank argued that ldquotoget out of deflation there were no clearinstruments and a mere announcement without instruments would not convincemarket participants to change their
inflation expectationsrdquo Others in theBank on the other hand suggested thatldquothe commitment to keep the zero interestrate policy until the inflation rate becomesstably above zero has similar effects toinflation targetingrdquo e Policy Boardmembers were cautious had mainlyfollowed the consensus and were unwill-ing to adopt ldquounorthodoxrdquo methods which points towards another reason whythe Bank of Japan failed to overcomedeflation ey made mistakes at a techni-cal level regarding interest rates moneysupply etc
Furthermore analyzing the periodfrom 1997 to 2010 Japanrsquos GDP growthturned negative shrinking the economyitself Japanrsquos government hiked theconsumption tax by two-thirds fromthree percent to five percent in 1997 while slashing personal income taxes byanother 32 percent corporation taxes byanother 38 and inheritance taxes byanother 48 percent In other words from
1997 to 2010 the government slashed progressive and proportional incomecorporation and inheritance taxes bynearly thirteen trillion yen while hikingconsumption taxes by more than sixtrillion yen What can you expect otherthan for consumption to shrink further when a government continues to slashtaxes on richer citizens and larger corpo-rations who spend the smallest portionof their incomes and wealth on consump-tion and continue to hike taxes on poorer
citizens and smaller businesses whospend the largest portion of theirincomes and wealth on consumption What the government did was even
better It curtailed consumption growthaltogether to zero percent and with noannual growth in domestic consumptionsuppliers cut their capital formation bythree percent annually while shrinkingtheir inventories by 48 percent annually
Since consumption capital formationand inventory increase comprised 99 percent of Japanrsquos economy during this period and the latter two are driven byconsumption which was no longergrowing there was no way that Japanrsquoseconomy could grow
From 1992 to 1995 despite weakeconomy the exchange rate kept ongetting appreciated with no apparentmacro-fundamental reasons for it Itmoved to 80 yen per dollar during thespring of 1995 from 100 yen per dollar Atthis stage it was very much required forthe exchange rates to be depreciated forcontrolling the declining situation of theeconomy which was generally avoided
is appreciation in the exchange rateas highlighted by the economists ldquodamp-ened an expectation of early recovery andcontributed to disinflation and thendeflationrdquo
Several debates have been carried outfocusing on what the Bank of Japan couldhave done for preventing deflation tooccur and to get worse In the studies at
Journal of The Institute of Bankers Pakistan10
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 1548
tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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7232019 Journal of Bankers
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 2548
n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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From 1992 to 1995
despite the weak
economy the exchangerate kept on getting
appreciated with no
apparent macro-funda-mental reasons for itrdquo
ldquoFederal Reserve Boardrdquo many academicsand policy makers have argued that ldquotheBankrsquos actions were too little amp too late atleast in retrospect in preventing deflationfrom emerging and fighting out ofdeflationrdquo
LESSONS TO BE LEARNT FROM JAPANrsquoS LOST DECADE
bull
bull
bull
bull
bull
In order to avoid a situation like thatof Japan monetary policy is an impor-tant measure It is not just limited tomoney supply and interest rates butthe disposal of failed banks as well asdebtors
e Sooner the better if you cannotavoid the failure Japanrsquos total bad debts
were around 12 Trillion Yen in 1991Since the Ministry of Finance did notdispose the loan they became huge asthe land price collapsed around 100trillion yen in 2003
Aer the crash money should beeased promptly by the central bankBecause the Bank of Japan was unableto stop the bubble and when it burstin January 1990 the bank did notchange the very monetary policy
When the policy got eased in July1991 BOJ was too cautious due tothe fear of another bubble As a resultthe prices of real estates and stocks fellto less than 15 of their peak
Emergency fiscal stimulus wasrepeated by the Japanese governmenttrying to rescue the economy whichresulted only as the vast amount ofgovernment deficit 180 of GDPSince many companies and banks were insolvent the money supplied by
the government was used to make upzombie banks and companies wholooked alive but were dead in reality
For restructuring money supply canhelp whereas interest rate is not veryeffective under deflation In 1999 theinterest was reduced to zero by BOJand that did not improve the ongoingcrisis as the real interest rates werehigh under deflation BOJ began withthe quantitative easing from 2001
policy that supplied large amount ofmoney which decreased the pain ofthe surgery by banks and companiesto restructure themselves
Japanrsquos economy is not doing very wellrecently Since the asset bubble burst ofthe early 1990s the country is suffering aslow growth rate even negative along with the price deflation Economicstatistics remain distressed and above all
the nations mood in terms of both producers as well as consumers has turned pessimistic Some are still of the opinionthat Japan is a high income country whereas others say transition to a neweconomy is getting prepared under arecession and some companies are doing very well We cannot ignore the fact that Japanese economic performance had beenless than expected in the last decade or soe Japanese monetary authorities havefaced with two basic problems due to therecent history of Japanese monetary policy First Japan was le in a prolongdeflationary environment due to theBOJrsquos policies where lowering theshort-term interest rate remained nolonger efficient and effective as the floorof zero was hit by the policy rate
Second Japanese monetary policy forthe past le the bank with severe credibil-ity problems e public as well as themarkets were unconvinced that thecountryrsquos monetary policy can be commit-
ted to future expansion returning theeconomy to health again Due to thesetwo problems Bank of Japan was present-ed with particular challenges for finding
solution in order to get the economy outof deflation quickly e Bankrsquos decisionof raising the discount rates in May 1989 was criticized as a step taken too late eBankrsquos focus on limiting yen appreciationin the second half of the 1980s accommo-
dated asset inflation and made it difficultto achieve a so landing in 1989 eBank was criticized for overly tight policyin the first half of the 1990s Once policyshied to ease aer 1994 the Bank wascriticized for not more aggressivelyincreasing monetary growth and prevent-ing a slow downward dri in prices overthe decade
e reasons why Japan has beenunsuccessful in solving the problems ofdeflation for the past two decades can besummarized as follows
bull
bull
bull
bull
Lack of politicaleconomic leadership
e policy board members werecautious and mainly followed theconsensus and were unwilling toadopt ldquounorthodoxrdquo methods
ey made mistakes at a technicallevel (regarding interest rates moneysupply etc)
Japan was in a ldquobalance sheetrecessionrdquo and the authorities tackledthe symptoms not the causes
Journal of The Institute of Bankers Pakistan 11
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
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tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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MONEY LAUNDERING amp
TERRORIST FINANCING
Understanding the Trends amp Typologies
Over the last three decades
phenomenal growth of financial
services has been observed dueto advancement in technology
and globalization This growth
has led to increased cross-border
activities to boost up global
financial intermediation But on
the other side this development
has also promoted transnational
organized crimes including
Money Laundering and TerroristFinancing (ML TF) enacted by
underground economies
oney laundering (ML) is defined as the process wherebycriminals attempt to obscure the illegal origin andor illegitimateownership of property and assets that are the results or proceeds
of their criminal activities In Financing of Terrorism (FT) both legitimate
and illegitimate money is characterized by concealment of the origin orintended criminal use of funds e term Terrorist refers to any person whocommits or attempts to commit participates as an accomplice organizes ordirects others or contributes to terrorist acts directly or indirectly
Money laundering and terrorist financing are making global threats tointernational peace and security which could destabilize worldrsquos develop-ment and progress
e United Nations 2000 Convention Against Transnational OrganizedCrime also known as the ldquoPalermo Conventionrdquo defines money launderingas e conversion transfer concealing disguising acquisition or posses-
sion of property associated with illegal origins or intentsacts of criminals
Financial Action Task Force (FATF) has designated the categories ofoffences eg terrorism Illicit trafficking in narcotic drugs amp arms corrup-
By Subtain Raza
Journal of The Institute of Bankers Pakistan12
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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tion and bribery counterfeiting currencysmuggling fraud piracy extortion andinsider trading and market manipulationetc which heavily contribute to MoneyLaundering amp Terrorist Financing
e Difference between Money
Laundering and Terrorist Financing
e fundamental difference betweenterrorist financing and money launderinginvolves the origin of the funds In Terror-ist financing the miscreant uses funds forillegal religious political or specified purposes but the trail of money might notnecessarily come from donations govern-mental covert funds or aid from agenciesTerrorist financing may be supportedboth by legitimate and illegitimate
proceeds Money laundering alwaysinvolves the proceeds of illegal activitye rationale of laundering the money isto enable the money to be used withlawful rights From a technical percep-tion frequent laundering processes usedby terrorists and other criminal organiza-tions are similar Although it would seemcommonsensical that funding fromlegitimate sources does not need to belaundered there is a need for the terroristgroup to obscure the link between it andits genuine funding sources
Terrorists and money launderers usesimilar methodologies to rout theirmoney through various channels to avoiddetection such as placement structur-inglayering and integration the paymentsto avoid reporting and undergroundbanking such as the ancient system ofHawala or Hundi
Stages In Money Laundering amp TerroristFinancing Process
Money laundering amp Terrorist financingoen involves a multifaceted series oftransactions that are usually complicatedto trail Generally three phases of Moneylaundering are involved in this process
Placement
e physical placement or disposal of cashor other assets derived from criminalactivity While using placement mode the
money launderer instills the illegal proceeds into the financial channels orfinancial system e illegal proceeds maybe placed in financial institutions casinosshops and other designated non-financial
businesses both national and internation-al In this stage the transactions may be processed such as Breaking up largeamounts of cash into unidentified sumsand depositing them directly into variousbank accounts Channelizing cash acrossborders to deposit in foreign financial
institutions or to buy high-value goodsmdashsuch as artwork antiques and preciousmetals and stonesmdash that can then beresold for payment by other instrumentseg cheque or bank transfer
Layering
e severance or partitioning the illicit proceeds from their origin by layers offinancial transactions with motives toconceal the source of the proceeds is
particular stage is intended to reshape the proceeds of the crime into another formand creating complex layers of financialtransactions to avoid the audit trailsupply channel and ownership of funds
is stage can involve processes such asFrequently sending wire transfersconverting deposited cash into monetaryinstruments (eg travelerrsquos cheques)reselling high-value goods and prepaidaccessstored value products investing inreal estate and legitimate businessesinjecting money in investments such asstocks bonds or l ife Insurance and maneu- vering shell companies or other structuresto obscure the ownership of assets
Integration
Production of apparent legitimacy toillicit proceeds through the re-entry of thefunds into the economy by showing it tobe normal business activities or personaltransactions is stage entails using
laundered proceeds in seemingly normaltransactions to create the perception oflegitimacy e parties involved inlaundering may choose to input the fundsin real estate financial ventures or luxuryassets A successful integration transactionmakes it difficult to distinguish betweenlegal and illegal wealth is stage providesa launderer the opportunity to increase his wealth with the proceeds of crime
Typologies In Money Laundering ampTer-
rorist Financing
Basically Typologies involve the study ofmethodologies techniques and trends ofmoney laundering and terrorist financing
As a series of ML or TF arrangements areconducted repetitively in a similar manneror using the same methods we notify themas a ldquotypologyrdquo e FATF amp APG under-take comprehensive typologies research tobetter understand the money launderingand terrorist financing environment e
following examples taken from APGresearch sheds light on few key moneylaundering and terrorist financing methodstechniques schemes and instruments
Money Exchanges Converting Cash
is typology is being used to aid the process of smuggling to another jurisdic-tion or to exploit low reporting require-ments on currency exchange houses tominimize risk of detection
Use of Couriers for Currency Smuggling
Illegal movement of currency to avoidtransaction cash reporting measures
Smurfing
Using a novel technique involving frequenttransactions (deposits withdrawals transfers)to avoid detection threshold reportingcompulsions
Use of Financial Instruments
Use of credit cards cheques promissorynotes etc to have funds held in a financialinstitution oen in another jurisdiction
Purchase of High Value Commodities
A method to purchase intensive high value products like gems precious metalsetc to mask the ownership or move value without detection and avoid financial
sector AMLCFT measures ndash eg move-ment of diamonds to another jurisdiction(a detailed presentation in HollywoodMovie ldquoe Blood Diamondrdquo)
Investment in Real Estate Race Horsesand Vehicles
Illicit proceeds are invested in high valuenegotiable goods to take advantage of reducedreporting requirements to make the source of proceeds of crime incomprehensible
Mutual Commodity Exchanges
Motive of this methodology is avoidingthe use of money or financial instruments
Journal of The Institute of Bankers Pakistan 13
7232019 Journal of Bankers
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
7232019 Journal of Bankers
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
7232019 Journal of Bankers
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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ldquo Underground banking
systems are being used
to remitt money Various
case studies revealed
the features that most
of money launderers
and terrorist financers
use this mode of money
for remittance because
it is the most confiden-
tial method to move
value without detectionand to obscure the iden-
tity of those controlling
fundsrdquo
ldquoMoney Laundering
and Terrorist
Financing crimes
are emerging
abruptly impacting
potential negative
consequences on
the economic polit-
ical and social pro-gressrdquo
in value transactions to evade financial
sector AMLCFT measures ndash eg a directexchange of heroin for gold bullion
Wire Transfers
is typology is assisted by electronicallytransfers e funds are routed betweenfinancial institutions and oen to another jurisdiction to avoid exposure and confis-cation
Alternative Remittance Channels
Underground banking systems are beingused to remitt money Various case studiesrevealed the features that most of moneylaunderers and terrorist financiers use thismode of money remittance because it isthe most confidential method to move value without detection and to obscure theidentity of those controlling funds esechannels are eye-catching to terroristfinanciers Al Qaeda successfully instigatedits operations because of effective transfersof money by hawalahundialternativeremittances before September 11 2001
Trade-based manipulations
To assist the agenda of money launderingand terrorist financing the malpracticesused by male factors are invoice manipula-tion overunder invoicing and alterationsin trade finance routes and commoditiesto avoid financial transparency laws andregulations
Gambling amp Gaming activities
ese activities involve buying ticketsfrom legitimate players using casino chips
as currency for illicit transactions using
online gambling to obscure the source offunds Most activities are performed incasinos horse racing internet gamblingetc
Exploitation of (NPOs) non-profitorganizations
Terrorist funds and other illegal proceeds may be legitimized by using theshield of (NPOs) non-profit organiza-tions
Investment in Stock Exchanges orCapital markets
ere are motives to avoid exposure of proceeds of crime by purchasing negotia-ble instruments available in capitalmarkets
Intermingling of legal business withillegal activities
To obscure the source of funds this is an
instrumental step by money launderers tocombine the proceeds of crime withlegitimate business monies
The Processes of Money Laundering and Financing of Terrorism
Integration
Layering
Funds moved to other Institutions to obscure origin
Placement
CashAsset deposited into the 1047297nancial ystem
Money Laundering
Proceeds from Criminal ActionsLegitimate Assets or Proceeds from
Criminal Acts
Fund used to aquire legitimate assetsFund distribted to use fund
terrorist activities
Terrorist Financing
Journal of The Institute of Bankers Pakistan14
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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Use of FrontShell Companies
Presently launderer and terrorists areusing these bodies to avoid the identity of persons controlling funds and take advan-tage of relatively low reporting require-
ments
Trust Company Service Providers
ese are persons and entities that profes-sionally create administrate or managethe corporate vehicles ese vehicles areused to obstruct the access to peoplecontrolling funds
Use of Trusts
e term trust expresses the legal relation-ship that is accorded by a person (theldquosettlorrdquo) where assets are handed overunder the control of another person (theldquotrusteerdquo) for the benefit of one or morebeneficiaries is mode of involvementevades the identity of persons controllingillicit funds
Use of ldquoGatekeepersrdquo or ProfessionalServices
e involvement of lawyers accountantsbrokers etc with intentions to hide andguard the beneficiaries and the source of
illegitimate funds Alternative Delivery Channels
Exploiting the new payment technologiesfor money laundering and terrorist financ-ing is another typology with impendingthreats Examples include computerATM cards and cell phone-based remit-tance and payment systems
Money Laundering and Terrorist Financ-ing crimes are emerging abruptly impact-
ing potential negative consequences onthe economic political and social progress ere is a dire need for countriesto have more strong anti-money launder-ing policies regulations and independentauthorities to cope with this concernInternationally effectual efforts egcontributions from FATF IMF WB and
UNO have been launched to fight againstMLTF and most of the countries haveshown exceptional cooperation inconnection to devise monitoring andsurveillance systems for financial institu-tions cross border money amp drug
smuggling regulatory measures andinternational cooperation to preventdetect and respond money laundering andterrorist financing
As financial institutions have more diverse products like customer accounts wiretransfers correspondent banking andforeign exchange services etc consequentlythere are more concerns regarding exploita-tions of these entities erefore moredynamic efforts like strengthening theAMLCFT policies reporting officer
designation based on experience and qualifi-cation co-operation with the supervisoryauthority effective tools for customer duediligence rapid monitoring and respondingto suspicious transactions and AMLCFTemployee training program can play theirconsiderable role in combating moneylaundering and terrorist financing
Journal of The Institute of Bankers Pakistan 15
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
7232019 Journal of Bankers
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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The term risk (from the Italian word risico or rischio which in turn comes from the Classi-
cal Arabic word rizq means what providence holds in store) refers to any contingency
that if it were to materialise would cause harm or loss Risk is a fundamental concept in
any management process today given how closely it is tied to organisationrsquos business
activity This is also true of a central bankrsquos activities Indeed it could be said that no activ-
ity is free of risk Realising this since their inception central banks have developed various
mechanisms to protect against such eventualities gradually giving shape to a modern
proactive and systematic risk-management discipline Risk management today comes
under the umbrella of what is termed corporate governance and it aims to formalise and
consolidate the procedures of identifying assessing responding too and monitoring risks
so as to minimise their impact on operations
By Helena Tejero
Journal of The Institute of Bankers Pakistan16
GLOBAL PERSPECTIVE
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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lthough there is no universalconsensus among centralbanks about the range of
possible contingencies two categories areoen distinguished financial risks(market credit and liquidity risks) andoperational risks e former derive from
possible financial events that may have anegative impact on the value of financialassets By contrast operational risks relateto harm caused by inadequate internal processes (or failures) people or systemsor as a result of external events
All central bankrsquos activities can be affectedby operational factors whether internal orexternal and these may translate into aloss One of a central bankrsquos most signifi-cant tasks is cash management is
involves putting cash into circulation andthe withdrawal exchange safekeepingand recycling of legal tender banknotesand coins while ensuring their quality andauthenticity It also entails supervising andmonitoring the economic agents andentities participating in the cash cycle andin cash processing and handling
In 2005 the Banco de Espantildea set up asystem to identify evaluate and adopt thenecessary measures to mitigate operation-al risks and to prioritise resources byestablishing the most suitable policiesmethodologies procedures tools andorganisational structures All the Bankrsquosorganisational areas apply this model in particular the Cash and Issue Depart-ment which is responsible for cashmanagement
i) Functions processes and activities
e starting point for operational riskmanagement systems is an inventory of
the functions processes and activitiesthat each organisational area undertakesand which make up each unitrsquos processmap is preliminary step is necessary inorder to identify the risks to which theexercise of this responsibility is subjectAn example of the main elements of a possible business process description isgiven below
Cash management functions and processes
Cash management is a core activity of anycentral bank and the members of theEuropean System of Central Banks are no
exception e functions of the Bank isspecifically entrusted within this context
bull
bull
bull
bull
bull
bull
bull
Within the huge range of possible organi-sational models to fulfil its role a CashDepartment may be subdivided into thefollowing areas or divisions
bull
bull
bull
bull
bull
In order to control risks appropriatelyeach division implements a series ofmitigating measures which in turn arebacked up by the checks performed by theDepartment responsible for the Bankrsquosinternal controls
A review of the activities performedmakes it possible to identify the number
Executing the countryrsquos issuance policyand decision-making in coordination with the European Central Bank(ECB) on the quantity of banknotes
to manufacture and who is responsiblefor producing them and the general policy of putting banknotes intocirculation and withdrawing them
Managing and controlling the puttinginto circulation of coinage on behalf ofthe State Treasury
Estimating future banknote and coinneeds
Determining the general characteris-tics of automated banknote handling verifying banknote authenticitysorting banknotes by conditiondestroying banknotes unfit to return tocirculation and checking the quality ofthe cash in circulation
Coordinating the application of theanti-counterfeiting strategy
Storing the banknotes in the logisticstock and the Eurosystem strategicstock owned by the ECB and manageinternational shipments
Conducting cash transactions with the public sector financial institutionsand the public
Issue Division which implements thecentral bankrsquos issuance policy
Custody Division which managesdaily operation of putting into circula-tion and withdrawal from circulationof banknotes and coins with privateindividuals and the banking sector
Industry and Technology SupportDivision which supports the divisionslisted above and manages humanresources infrastructure and the equip-ment entrusted to the department
External Relations Division whichcoordinates and manages generalaspects of the departmentrsquos externalactivity and its relationships with cash professionals and
Risk Internal Control and SecurityDivision
Source Banco de Espantildea
Processes description methodology
Journal of The Institute of Bankers Pakistan 17
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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of processes (not usually less than 20 in aCash Department) covering all therelevant workflows for the execution ofthe tasks entrusted to the department By way of illustration a description of one process-automatic banknote sorting-isdescribed below
ii) Identification of risks
e identification of the inherent risks ofany activity is based on an analysis of the possible contingencies that may affect itsfunctioning is involves studying various scenarios by asking the questionldquowhat ifrdquo For example what wouldhappen if a business process failed or wasinappropriate What would the conse-quences be in economic terms for the
Bankrsquos reputation andor its failure tomeet its objectives What is thelikelihood of this happening
In order to fully identify all the possiblecontingencies the model classifies anumber of scenarios us as well asconsidering the possibility that a processfail it is assessed what would happen ifthere were faults in the systems orinfrastructure internal or externalmalicious acts labour-related incidents ormore extreme events
In the cash management area there is a wide range of possible events such asunder or overestimating the number ofbanknotes to produce faults in banknotehandling machinesmisappropriationof banknoteso c c u p a -t i o n a lacci-
dents during coin handling disastersbefalling the reserve vault or the robberyof a cash-in-transit van
From the foregoing it may be deducedthat the reasons why a risk materialisesmay be external ie beyond the Bankrsquos
direct control such as natural forces oracts or omissions by third parties Forinstance new regulations on banknote usemay have a significant impact on futuredemand which could result in the
number of banknotes to produce beingunderestimated or criminal
organisations may emergethat pose a threat of
largescale theRisks may also
Source Banco de Espantildea
Automatic banknote sorting process
be internal such as the acts or omissionsof staff shortcomings in the design orexecution of processes and systemsmalfunctions
While operational risks are inherent toany activity ie they are always present
organisations have developed relativelyeffective systems to protect against themby addressing their root causes ereforeone of the most important steps in riskmanagement is the identification andimplementation of controls ie specificmeasures adopted with the purpose ofmitigating risk either to avoid an eventrsquosoccurring (frequency) or to reduce theharm it would do if it did ultimately occur(impact) or to act on both aspects For
In 2005 the Banco
de Espantildea set up a
system to identify evaluate
and adopt the necessary meas-
ures to mitigate operational risks
and to prioritise resources by
establishing the most suitable
policies methodologies proce-
dures tools and organisational
structuresrdquo
Journal of The Institute of Bankers Pakistan18
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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example to reduce the possible impact oferrors in cash deposits an ldquounprocessedbanknotesrdquo system may be implemented whereby financial institutions expresslyirrevocably and unconditionally waive theright to be present during counting and validation and wholly accept without the
possibility of any claims the count performed by the central bank and thecorresponding debits andor credits tosettle any differences that may potentiallyarise in counting Alternatively to reducethe frequency of possible shipmenttransport-related contingencies a systemof auxiliary deposits could be set up bybringing together a number of creditinstitutions under the management of oneentity that using the services of an agentspecialising in funds transport storage and
handling receives a quantity of banknotesfrom the central bank in the form of adeposit sufficient to meet the needs of thefinancial centre in which it operates
It should be noted that the effectiveness ofthe controls varies according to themoment they are applied their level ofautomation and their scope us thecontrols may be preventive (anticipatingthe risk event to avoid its occurrence or tominimise its impact for example theldquofour eyesrdquo principle) corrective (put intooperation once the event has materialisedso as to minimise its impact such asbusiness continuity plans) or predictive(to predict the occurrence of events suchas the use of statistical models to predictthe future demand for cash) Moreovercontrols may be automatic (for examplebanknote processing machines) or manual(presence of security personnel) or theymay be applied to all operations (verifica-tion of the contents of all the bags ofcoins) or only to a sample (verification of
the contents of a bag selected at random)
iii) Risk assessment
Not all risks are equally important andnot all controls mitigate them in the same way Moreover unlike some other types ofrisks such as financial risks there is nolink between operational risk and profita-bility erefore the ldquoappetiterdquo for opera-tional risk is zero although there may be adegree of tolerance or acceptance of it
erefore the management systemincorporates uniform rating scales for theorganisation as a whole and a tolerance policy in order to determine the relativeimportance of the risks and establish
Source Banco de Espantildea
I m p a c t
Frequency
Risk tolerance matrix
levels of action and thresholds at whichrisks are to be raised to the relevantdecision-making bodies
All the risks are evaluated based on 1)impact or damage they may causendashwhether financial reputational for theBank and or affecting the achievement ofits goals and 2) the frequency with whichthey may arise us for each event identi-fied the following questions are asked i) ifthe event occurs what financial or reputa-tional impact or failure to achieve goalsmay occur-measured qualitatively from 1to 5 where 5 is the maximum-consideringthe effectiveness of the existing controls
and ii) how oen could this risk material-ise measured qualitatively from 1 to 5 where 5 is the most frequent
Risks thus measured are plotted on a RiskTolerance Matrix (see figure below)Operational risks in the green area areconsidered exante tolerable and do notrequire an action plan However businessareas will inform the Bankrsquos Risk Manage-ment Committee of risks in the yellow orred areas and propose mitigationmeasures so that the body can approve oraccept the residual risks
Bearing in mind the financial andreputational impact of many of the
activities associated with cash manage-ment it is logical that on an aggregatescale the operational risk exposure issignificant
is is all so in those cases where thecontrol environment while beingextremely effective at reducing the proba-bility of occurrence to levels close to zerois unable to prevent significant damagebeing caused Imagine for example thatsomeone gained access to the securityfeatures incorporated in banknotes toallow their counterfeiting or that ashipment van was attacked by terrorists orsuffered a serious accident or that the
banknote vault were to flood or have afire or that human capital were lost without an effective succession planAlthough these situations all look highlyunlikely given the control measures in place their occurrence could cause verysignificant losses
iv) Handling and monitoring of risks
However not all risks are high impact orlow probability or have a robust controlenvironment It is therefore important toanalyse possible mitigation strategies and programmes to reduce the severity andfrequency of the contingencies identi-fied
Journal of The Institute of Bankers Pakistan 19
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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understanding the functions entrustedto the organisation and the activitiesderiving from them
identification of possible eventualitiesaffecting their operations
determining the relative importance ofeach
decision-making on the most effectivemitigation strategies and
ongoing monitoring of both theenvironment in which they operatethe risks and controls and incidentsthat occur both internally and incooperation with other central
banks
For example a natural disaster thatcould render the site holding a portionof the bankrsquos reserves inoperative Toaddress this possible eventualitybusiness continuity plans could bedrawn up to allow the most criticaloperations to be resumed on an alterna-tive sites such as services to creditinstitutions including both lodgementsand withdrawals of banknotes and coins We could also envisage more cash thanrecorded being delivered as a result of
human error and that someone mightsteal the difference In this caseautomated banknote traceability systemscould be used e use of money bagsmarked with bar codes or similar meansof identification would allow theirlocation within the internal distributionsystem to be ascertained at all times iscould also bring other benefits such asbetter control over incomings andoutgoings of money bags
However despite the attention paid torisk mitigation changes can occur in theenvironment and risks may materialise Ifthey do it is important to register the loss
events that occur and quantify theirimpact as well as investigating theirunderlying causes so as to prevent arecurrence where possible It is alsocrucial to compare the informationderived from these facts with the exanterisk identification and assessment in orderto adjust the impact andor frequency ofoccurrence to the reality of the factsEqually it is possible to compare thegoodness of the results of the internalself-assessment with the experience of
other central bank working groupsspecialised in operational risk such as theInternational Operational Risk WorkingGroup of which more than 50 centralbanks are members
us managing risk is not a one-off activi-ty but must be carried out proactively onan ongoing and systematic basis to avoiddaily activities being affected by contin-gencies and enable immediate action to betaken when necessary
Central banks in general and their cashmanagement areas in particular areexposed to significant operational risks
e ldquoappetiterdquo for risk being extremelylimited good practice has been developedfor efficient operational risk managementese practices need to cover at least thefollowing five stages
bull
bull
bull
bull
bull
This article was first published in Billetaria
Journal of The Institute of Bankers Pakistan20
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
7232019 Journal of Bankers
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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Banking
ECONOMICGROWTHi n P a k i s t a n
If we look at the history of economic
development in Pakistan the country
witnessed its first major high economicgrowth phase in the 1960s The country
was able to create an industrial capitalist
class but later on it was found that this
growth only benefited a very specific
minority class and created huge income
inequality After experimenting with
nationalization in the 1970s the high
growth phase returned in the 1980s The
economy experienced high growth rateswith foreign aid inflows but this time it
was not backed by the same productivity
growth as in the 1960s
By Salman Ahmed Shaikh
Journal of The Institute of Bankers Pakistan22
BANKING
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
7232019 Journal of Bankers
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7232019 Journal of Bankers
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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7232019 Journal of Bankers
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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n the later part of the 1980sPakistan went to the InternationalMonetary Fund (IMF) and e World Bank for Structural Adjust-
ment Program (SAP) IMF recommend-ed privatization diminished role ofgovernment in running businesses
deregulation and liberalization e plan also pushed the country to removequotas on international trade lowertariffs expand list of importable itemsreduce subsidies and increase indirecttaxes ese SAPs brought negativeimpact on growth inflation incomedistribution the social sectors and poverty in the lsquolostrsquo decade of 90saccording to Akber Zaidi in his bookldquoIssues in Pakistan Economyrdquo
Dawn of the new mil lennium broughtfresh investment capital and huge inflowof remittances However the economicmanagement during the first decade of thenew millennium could not convert thisthird phase of high economic growth intoa sustainable process by implementingstructural reforms
Aer World Trade Organization(WTO) regulations were put in place theglobal trade is now increasingly replacing
quota-based trade restrictions with tariffsTrade policy cannot be made in a vacuumand using import substituting industriali-zation and maneuvering exchange ratescannot help to replicate similar growthlevels of the past
Apart from the structural change in production and employment there alsohas been a change in the exports andimports mix and diversification in importsources and export destinationsNon-Discriminatory Market Access
(NDMA) status to India GeneralizedSystem of Preferences (GSP) Plus statusextended to Pakistan and prospects ofnew trade ties with Central Asia especial-ly in the energy sector present new prospects as well as challenges forPakistan On the other hand the countryneeds to diversify its export marketsespecially if the economic crisis continuesin Europe But amidst these opportuni-ties weak law and order situation andenergy crisis has led to not only capital
flight and brain drain but a lot ofestablished entrepreneurs have shiedtheir production facilities to countrieslike Bangladesh and Turkey
1 Challenges for Pakistanrsquos Exports
Energy Crisis
Energy crisis in Pakistan has worsenedespecially since 2005 It has led to loss of potential output increased incidence of
manufacturing sector unemploymentcost push inflation capital flight lowmanufacturing capacity utilization andloss of export markets e contributingfactors to the crisis include inefficientenergy mix price distortions and lowinvestment in alternate energy e shortterm measure by the government toabsorb loss from price distortions createdby an inefficient energy mix has resultedin the ballooning fiscal deficit
For estimating the cost of energy onoutput in Pakistan a study at PakistanInstitute of Development Economics(PIDE) estimated the cost of unservedenergy using primary data from firmsAccording to their estimates the overallindustrial sector loss ranges between Rs269 and Rs 819 billion e figure rough-ly equals 1 to 3 of total GDP per year
Furthermore oil related imports ofPakistan now exceeds one third of totalimports Rising oil prices have resulted inhigher imports balance of paymentsdeficit decrease in value of rupee andsoaring inflation
It is now appreciated by almost allcircles that at current consumer prices forelectricity the energy mix has to be modi-fied is modification in mix requiresnew projects and these projects requirehuge amount of financing But due todelay in tax reforms and administrationGovernment is already cash starved with
mounting fiscal deficit and it cannotsustain the subsidies
Since energy is a major component ofcost of production and transportation itleads to cost-push inflation spiral in theoverall economy Hence the final export price of finished goods especially in the wake of free trade aer WTO rules is nowcompetitive with the rest of the world
Law amp Order Crisis amp Weak
Governance
Security of property rights has been one ofthe most important determinants of whysome countries developed quickly than
others In Pakistan return to democracyin 2008 aer the military rule ended washoped to change matters But politicalforces in capitalistic democracy contribut-ed in maintaining the status quo by providing token benefits to their votersand by creating and encouraging an
environment where the common publichas no choice than to join hands andsupport them to safeguard their private property rights One of the reasonsbehind capital flight brain drain and lackof domestic and foreign investment is theinadequate provision of civil as well as private property rights in Pakistan
2 Macroeconomic Imbalances
Low Savings and Investments Ratio
Economic growth literature highlightsthe importance of capital formationcomplimentary investments and physicaland social infrastructure Pakistan is oneof those countries that have very lowsavings rate Pakistan has one of the lowestinvestments to GDP ratio in the worldOne of the prime reasons of low invest-ment to GDP ratio include the high costof doing business which includes i) hightaxes in the formal sector ii) supply sidebottlenecks iii) weak law and ordersituation and iv) weak legal system andenforcement
High Trade Deficit
Pakistan has achieved steady increase inexports in absolute terms but the importshave surged steeply than the exportsFigure 1 shows that the gap betweenexports and imports is increasing asrepresented by the vertical distancebetween the two curves e trade deficit
has widened in 2005 and 2008 when the world oil prices swelled However withthe continuation of energy and securitycrisis and rapid decline in foreign invest-ment the trade deficit has continued torise In recent quarters the trade deficit isnarrowing down as world oil pricescontinue to decline
Rapid Rupee Depreciation
Rupee has witnessed a free fall during
2008-13 than in the almost twice as longMusharraf era before that In FY08PKRUSD exchange rate was hoveringaround PKR 60 But in 2008 rapid depre-ciation of rupee began e chief reasons
Journal of The Institute of Bankers Pakistan 23
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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ciation of rupee began e chief reasons were decline in foreign investment global
economic crisis oil price shocks domesticinstability and agitation and resumptionin Pakistanrsquos foreign commitments to theinternational lenders Only in 2012 and2013 rupee has depreciated by about25 as shown in Figure 4
Reasons for the rapid depreciation ofrupee include a) high import bill ii) lowForeign Direct Investment (FDI) and iii)constancy in remittances Year-on-Yeargrowth e spurt in exchange rate in2013 was also influenced by speculativerun and uncertainty over Pak-US andPak-IMF relations Rise in import bill andslack growth in exports had led to arelatively more increase in demand thansupply for USD e Central Bank initial-ly decided not to intervene and themarket forces together with speculatorslet the rupee depreciate speedily Lateintervention by e Central Bank hadstopped the damage for the time beingbut the fundamental drivers for suchrapid depreciation still need to be tackled
with sound macroeconomic policy andlong term economic planning
Fiscal Imbalances
Pakistan is classified as lower to middleincome country by IMF and it is ironicthat amongst those countries Pakistanhas lowest taxes to GDP ratio InPakistan despite the spurt in economicgrowth since 2003 the tax to GDP ratiohas consistently declined and now it is
one of the lowest in the world InPakistan the income tax collection is notas broad based as it should be and lack ofdocumentation and lsquoun-documentationrsquodue to stringent conditions for formal
Figure 2 Top Export Markets by Size of
Exports for FY13
Figure 1 Imports and Exports (in bln $)
During 2005-2014
Source Pakistan Bureau of Statistics Source State Bank of Pakistan
3887280
37
2698910
26
1485569
14
1370196
13
1058617
10
Exports (in $ mln)
U S A China U A E Dubai U K Afghanistan
Figure 3 Exports Composition during FY09-FY13
Source Pakistan Bureau of Statistics
Figure 3 presents the export composition of Pakistanrsquos exports by commodity groups It can beseen that energy crisis and deteriorating law and order situation has taken a toll on competi-tiveness of Pakistanrsquos manufactured exports e ratio of Pakistanrsquos manufactured exports has
declined from 74 to 68 during 2008-13 It shows that value addition has become costly inPakistan with the continuation of energy crisis weak law and order situation and high cost ofcapital amidst tight monetary policy stance by the central bank until recently
Figure 2 represents major export destina-tions for Pakistanrsquos products It can be seenthat a lot of room exists for trade withSAARC countries Central Asian countries
African countries and GCC countries With Economic crisis in USA amp Europeand geo-political crisis in Middle East it is
pertinent to seek further diversification inexport markets
sector has resulted in slow progress in theexpansion of tax base Only 2 of the population in Pakistan is registeredtaxpayers e result of low tax collectionis reflected in low investment in develop-ment and industrial infrastructure andlower scale of provision of key publicgoods which are essential for enabling the
existing firms to remain competitive andto attract new private investment in thecountry
Figure 4 Exchange Rate PKRUSD (2008-2014)
Source State Bank of Pakistan
Journal of The Institute of Bankers Pakistan24
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7232019 Journal of Bankers
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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NEEDfor Vast Spread
ATMsin Pakistan
ATMs play a significant role for
the banking sector and its
customers in dealing with their
service and cash requirements
mainly in non-banking hoursthroughout commercial cities
and metropolis of the country
The importance of ATMs could
be determined with the value
and volume of transacted
amounts through the machinesowned by different banks
By Muhammad Arifeen
Journal of The Institute of Bankers Pakistan26
BANKING
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
7232019 Journal of Bankers
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
7232019 Journal of Bankers
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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7232019 Journal of Bankers
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orld Bank defines ATMs ascomputerized telecommunica-tion devices that provide clientsof a financial institution access tofinancial transactions in a public
place ere are only 7 Automated TellerMachines for 100000 adults in Pakistan
as banking happens to be one of the fastestgrowing and profitable industries eofficial data reveals that as of June 30th2014 there were 8240 ATMs acrossPakistan in a population of 200 millionout of which 65 percent are adultsAccording to State Bank of Pakistan100000 of the countryrsquos total 12 percentbanked population were reliant on cashmachines for their financial transactions at
public places
In view of the acceptability of ATMsand 12 percent of the countryrsquos totalbanked population the State Bank believesthat there is a need to increase financialliteracy and acceptability of electronicbanking channels amongst people eDeputy Governor of State Bank ofPakistan has voiced his concern over thegrowing demand for ATMs in the countryand urged the banking sector to increasethe number beyond the existing 9000ATMs deployed in the country
Pakistan maintains a ratio of 649ATMs per 1000 individuals is figure isconsiderably lower than the average
present globally India boasts of 1327ATMs per 1000 individuals and is actively
working towards increasing this figureere are 290 machines in South Korea173 in US 424 in Indonesia Pakistanibanks are aiming towards increasing theATM machines count by 500-600 in2015
Commercial banks are seeing continu-ous expansion throughout the country Formeeting the increased cash transactiondemand of customers the AutomatedTeller Machines network of commercialbanks increased to 9018 by the end ofDecember 2014
e installation of 308 ATMs increasedtheir total number to 6757 which is 176
percent higher than the number of ATMsat the end of the last quarter of the fiscal
year 2011-12 As many as 308 Automated
Teller Machines (ATMs) were installed and67 bank branches added to the onlinebranch network in the country in thefourth quarter of fiscal year 2013
In comparison with other plastic cardsATM-only cards showed the highestgrowth rate of about 45 percent e totalnumber of ATM-only cards issued so far is962000 although debit cards have thehighest percentage share (90 percent) inthe overall plastic cards category
In terms of the volume of overalle-banking transactions ATM transactionshave a major share of 637 percent and theaverage value per transaction stands at Rs10 007 In comparison with the number oftransactions reported in the third quarterthe overall volume of ATM transactionsincreased 8 percent while the value alsoincreased by 8 percent
e number of ATMs in the country
has reached 7684 for the quarter whichended in December 2013 showing anincrease of 102 percent from the previousquarter As of December 31 2013 forevery 100000 people there are 42 ATMsin the country and during the same periodRs 635 billion was transacted using thischannel
e State Bank of Pakistan has directedall the commercial banks to improve the
poorly managed ATM services across thecountry rough a circular the SBP had
instructed the banks to ensure round-theclock availability consistent monitoring ofATMs and mobilisation of maximumresources to timely resolve issues like lsquooutof cashrsquo hardware soware problems
power outages and connectivity glitchese State Bank of Pakistan has askedcommercial banks to deploy moreAutomated Teller Machines (ATMs) as thecurrently available network of 9000machines is insufficient to match thegrowing demand
It has taken notice of poor performanceof Automated Teller Machines and alsoasked the banks to immediately improvetheir functioning SBP also deputed inspec-tors to monitor the ATMs across the countryDuring Ramazan and Eid-ul-Fitr holidaysthe SBP through a circular advises all banksto meticulously comply with its guidelinesand instructions regarding management ofATMs operations in order to ensure continu-ous availability of ATM service
e authority imposes heavy penaltiesunder the relevant laws on those banks
which fail to comply with the guidelinesand instructions regarding management of
ATM operations and monitoring of ATMcashdowntime during Ramazan and Eidholidays e SBP has depute specialinspection teams to carry out surpriseinspections of ATMs throughout thecountry to ascertain the compliance level ofits instructions and guidelines by banks
Banks are required to take all necessarysteps to ensure continuous availability ofATM services
Banks have already been advised by SBPto make adequate back-up arrangements toensure availability of ATM servicesround-the-clock and put in place compre-hensive operating procedures to timelyresolve the cases of out-of-cash breakdownof ATMs systems and network Usually theATMs either do not work or are found
out-of-cash while in Ramazan due toreduced banking hours and during thattime more people rely on ATMs for cash
withdrawal
State Bank of Pakistan (SBP) penalizescommercial banks with recurringcomplaints of having dysfunctional andimpaired Automated Teller Machines(ATMs) aimed at improving system ofalternative deliver channel and bankingsystem throughout the country Sources
said that the banking regulator has consti-tuted a committee to investigate bankissues in operating ATMs as a large numberof complaints have been received by theconcerned department of e CentralBank
SBP is trying to resolve the issues ofbanks particularly the availability of cashon urgent basis so they could serve thecustomers without any delays andhardships e Central Bank decided toascertain snags at ATMs including
hardware faults to soware issues cashunavailability or link problem to giveguidelines to banks for fixing problems intheir respective ATMs In case the banksfail to maintain their ATM functioninground-the-clock e Central Bank willmost likely impose fine on the banks
Delays by banks in maintenance andcash feed in ATMs will be penalized toimprove the alternative delivery channel ofthe banking system e banking regulato-
ry wants to address the issues of customersregarding ATMs to facilitate them and togain their confidence on banking system
with best qualitative services
Journal of The Institute of Bankers Pakistan 27
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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Banking industry is considered to be
the largest and a dominating facet of
financial sector not only with regard
to turnover profits and employment
opportunities but also owing to its
paramount impact on the countryrsquos
economy as a whole It was for thesereasons that during the last few dec-
ades there has been a growing
tendency to apply marketing tools
and techniques to promote banking
activities However as a part of
banking activity marketing is of
recent origin Its advent can be
traced to the American Banking
Association Conference held in
1958 In Europe however it was not
until 1970 that marketing entered
into financial sector
By Dr Sabir Ali Jaffery
Marketing system ofphysical products has
several middlemen such
as distributors retail-ers and commissionagents As against this
the marketing of bank-ing services is a direct
function between sup-plier and the end user
Journal of The Institute of Bankers Pakistan28
BANKING
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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arketing has been defined by various men-in-profession as aldquopart of management activity
that seeks to direct the flow of bankingservices profitably to selected customersrdquo
e Rapid Results College (RRC)
London maintains that marketing forbanks involves
bull
bull
e Institute of Marketing Londonhas defined marketing as ldquohellipthe manage-ment process responsible for identifyinganticipating and satisfying customerrequirements profitablyrdquo
In the wake of increasing competitionamong banks and non-banking financialinstitutions marketing has becomeintegral part of banking activities Its rising
importance is marked by three majorfactors such as technology advancementand diversification of customerrsquos needs
However nature and scope of market-ing in promoting banking services issharply distinct from marketing oftangible goods
Marketing in banks has to performtwo different functions It has to attractdeposits as well as simultaneously persuade customers to utilize its servicesis two-fold nature of banking functionsmakes its marketing operations morecomplex as compared to those that arenormally faced by other commercial andmanufacturing organizations
Next to perceive marketing vis-agrave-visbanking activities it is of prime concern toidentify the distinct nature of bankingactivities which characterizes as under
Intangibility
Banksrsquo services are intangible in nature asagainst goods and commodities Hence problems of packaging storage transpor-
tation and inventory control are notrelevant to it Services of middlemen which are oen utilized in marketing physical products have no role to play inmarketing or selling bank services Moreo- ver the bank marketer does not have todemonstrate or display the lsquoproductrsquo that
he offers It therefore seriously limits thealternatives available to him which makeshis job solely dependent upon his profes-sional skill
(ii) Inseparability
It implies that availability and offer ofbank services are simultaneous e onlything in between is marketing activities to promote their sale
(iii) Individualized Marketing
Marketing system of physical products hasseveral middlemen such as distributorsretailers and commission agents Asagainst this the marketing of bankingservices is a direct function betweensupplier and the end user is necessi-tates establishment of extensive branchnetwork
(iv) Lack of distinctiveness
Services offered by different banks arealmost identical e emphasis istherefore shied from product to promo-tional strategies which consist of branchlocation marketing skill of the marketerquality of service introduction of newservices reputation and publicitycampaign
(v) Retaining
Retaining of a customer is more impor-tant than attracting one A disgruntledand dissatisfied customer may provesubstantially harmful
(vi) Diversified services
Banks to remain in the competitivemarket have to offer a wide range of products and services to meet variety ofbusiness needs of different class ofcustomers
(vii) Widely dispersed branch network
An intelligently developed branchnetwork plays pivotal role in laying
foundation of a bankrsquos expansion onsound footing leading to a prosperousfuture
(viii) Prudent Expansion
Banksrsquo main earning is from making
advances e well known maxim isldquowhile selling loans banks are buyingrisksrdquo Hence expansion both intensiveand extensive should be well thought ofand most articulately planned
ere are a few more special ities as underassociated with financial services Fiduciary Responsibility
Bankers by persuading customers to put
their funds under their (banksrsquo) care andcustody incur much heavier responsibili-ties toward their customers than thesellers of consumer products have towardtheir buyers Whilst it is inconvenient ifthe goods are substandard or not other- wise as per the sample these may bereplaced or repaired In contrast if abanker fails to meet his fiduciary responsi-bilities the implications can havefar-reaching and long-term effects
Impact of Economic Policies
Banking operations are directly affectedby the policy changes brought about bythe monetary authorities of the countrysuch as e Central Bank and e Minis-try of Finance For example the recent 1reduction in the interest rate announcedby the State Bank of Pakistan has upsurged the loan-giving activities ofcommercial banks
Changes in the economic and mone-tary policies of the country require that thetargeting planning executing andmonitoring of marketing activities needs tobe flexible so as to absorb the implicationsof such changes without much upheaval
Dual Function of Attracting Depositsand Lending
A customer of the bank is both the suppli-er and user of funds is entails atwo-fold marketing strategy to be pursued
by the bank marketers
In view of the typical banking activitiesand commensurate marketing techniques
People and techniques committed tomake best possible use of a bankrsquosresources to generate profits byidentifying and meeting the needs ofits present and potential customers
An approach to business or amanagement attitude that makes abank operate profitably by satisfying
its customersrsquo needs
Journal of The Institute of Bankers Pakistan 29
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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the bank marketing function evolves fivesubsets of management controllable variables as shown in Figure-1 abovetaken from the lsquoBank Marketing Manage-mentrsquo by Arthur Meidan Senior Lecturer
Sheffield University published at HongKong by e Macmillan Studies inMarketing p-5
e Marketing Functions in Banks
A bankrsquos marketing functions focus on thefollowing activities
bull
bull
bull
bull
bull
bull
bull
bull
bull
bull
This treatise would be meaningfully
concluded by reproducing what R Brienand J Stafford famous marketing wizards offered in their article ldquoTheMyth of Marketing in Bankingrdquo Whileoffering a two-fold role for marketing inbank management they stipulated ldquoone isat the level of formation of the marketingmix for the development of marketsegments which seem ndash according tomarket research --- to hold the bestopportunities for profitable exploitation While the second is of a philosophical
nature --- that all bank activities shouldbe so geared as to focus on the needs and wants of the customer --- which is areiteration of the total marketingconceptrdquo
BUSINESS
POLICY
Financialmanagement
Bankrsquos organization andcontrol variables
Environment(non-controllable)
variables
The controllable set ofmanagement variables
OperationsSystems and
PersonnelManagement
Marketingmanagement
Bank Objectives
Market segmentation
Customersrsquo behaviour
Calculated dispersion of branch network
Diversification of services A widerange of services offered is the nucleus
of business promotion activity
uality of service rendered Market-ing activity may procure a business butit can be retained only through quality
service
Pricing of product is should becompetitive but profit generating
Continued market research
A watchful eye on competitorsrsquo strategies
orough grasp of economic andmonetary policies of the countryand prompt notice of changes in
them
Bank marketers should have soundknowledge of the products of the bankand up-to-date information of laws
rules and regulations issued from timeto time by governments and regulatoryauthorities
Figure 1 The Bank Management System
Journal of The Institute of Bankers Pakistan30
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
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The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
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PRIVATE EQUITY INVESTMENTSOn the Horizon of Pakistanrsquos Financial Landscape
Private Equity (PE) Investment is a slight new concept with respect to Pakistani FinancialMarket Most of the times the term private equity investment is mixed with the term
public equity investments which are quoted on stock exchanges Both investment plat-
forms aim to provide capital to investee companies with an objective to earn higher returnson investments However it is unlikely to say that equity investments PE investments maynot be traded on stock exchange hence considered as illiquid investments ese are longterm and strategic investments and cannot be easily disposed-off PE investorstake a long term position for their investments and aim for h i g h e rreturns as compared to other available mode of invest-ments
By Zulfiqar Haider
Journal of The Institute of Bankers Pakistan32
BANKING
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
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View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
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7232019 Journal of Bankers
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7232019 Journal of Bankers
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Private Equity Concept
Private Equity is an asset class which aimsto invest in companies with the objectiveto generate superior returns by executing aspecific exit strategy In PE investmentsexit strategy is the way through which the
investors pull back their investments atspecified time with desirable returns PEInvestments are routed through partici- pating in ownership stakes of investeecompanies by acquiring of an old stock orby subscribing to the new issues either as amajority or minority shareholders
e basic ideology of PE investment is toinvest in those companies who are seekingfunds to commence construct completeor to enhance the performance of differ-
ent ventures in order to generate revenuesGenerally PE investors invest their moneyat a time when there is a potential thatInvestee Company will make higherreturns because at this stage the cost ofacquiring or subscribing the ownershipstake is comparatively much lesser thanthe cost of stock once the venture startsgiving the returns
PE investments are for longer tenure withthe risk of loss of invested capital ischaracteristic makes these investments asilliquid assets because investor cannotreadily sell these investments at desirablereturns So a typical PE investment aimsfor the holding period of 3 to 10 years Butthis feature of investment enables itsinvestor to generate a 2-10 times multipleinvested capital with an expected IRR of20-50
One thing must be understood that PEinvestments are not similar to simple partnerships in ventures Because partner-
ships are formed with an objective to runthe business over a time whereas PEinvestments are made with an aim to takeadvantage of dislocations in the market bymaking medium to long-term investmentsin areas where there may be a uniquesituation driven by a mismatch for capitalresulting in superior returns
Private Equity History and Initiatives inPakistan
In history if we search for the oldest PEtransaction JP Morgan stands out forexecuting a significant PE transaction where in 1901 they executed theleveraged buyout transaction of Carnegie
Steel Company for an amount of US$ 480million Later in 1946 some traditionalPE firms were established In the pastdecades there were so many popular PEtransactions with huge volumes ofamount invested in these transactions
In Pakistan formalized private equityinvestment is a relatively new concept PEMarket is yet not established and alsothere is no understanding for differentrules and regulations governing directly toPE market investments At present PEinvestments are governed through AssetsManagement Company Rules issued bySECP as mostly PE firms operate theirinvestments through a PE Fund which ismanaged by an Asset ManagementCompany or Fund Management Compa-
ny Recently SECP issued ldquoPrivate FundsRegulations 2015rdquo aiming to regularizethe formation and operations of PrivateFunds
US-Pakistan Business OpportunitiesConference held in 2013 was concluded with the launch of Pakistan Private Invest-ment Initiative to mobilize at least US$150 million in PE Investment USAgency of International Development(USAID) announced the Pakistan PrivateInvestment Initiative with Abraaj Groupand JS Private Equity Managementrough this initiative two new PE funds with the sole focus on growth of SMEsector in Pakistan will be establishedUSAID will provide a seed investment tocapitalize the Funds and other limited partners will match or exceed the fundcapital SECP has also proposed some taxbenefits for the income of PE Investments
So we can say that the PE investmentshave great potential in the upcoming years
as the economic indicators are favorablebecause returns are more lucrative forcommercial businesses when there isdeclining interest rate scenario in econo-my
Private Equity Risks amp Attraction
PE investment is highly attractive to thoseinvestors who can hold their funds for alonger period As mentioned earlier PEmarket is not yet formalized in Pakistan
hence there is no published comparisonavailable which shows the returns of PEinvestments over other modes of invest-ments However if we look around the world PE Investors target their rate of
return between 20-50 depending uponthe nature of transaction ere is a differ-ence for benchmarking the returns on PEfunds and other funds however if weanalyze the different research reports indifferent markets it is evident that thereturns on PE Funds are much more than
the returns available in bond funds ortraded equity funds
e higher risk of PE is supplemented byhigher returns e biggest risk faced byPE investors is the loss of capital investedAs this is a long term investment andcompletely based on the performance ofInvestee Company therefore there is a riskof not recovering the invested amount orthe underperformance of InvesteeCompany may result in the lower or no
dividends which can extremely hamperthe returns for PE investors ere are somany other risks associated with this typeof investment like market risk for under- performance of primary marketsexchange rate risk if there is currencydifference involves in investments liquidi-ty risk as these investments cannot be sold with readily recourse
All risks are controlled through invest-ment screening and monitoring criteria prepared implemented and executed by aPE Firm which manages the PE Invest-ments
How Private Equity Investment Works
ere are many different options availablefor PE Investors but a typically proven PEinvestment structure is one where a PEFund is established which is managed bya Fund Management Company (FMC) who use the fundrsquos capital to invest indifferent types of PE investments
e PE fund is established under thegoverning laws and capitalized by PEinvestors who called the Limited Partners(LPs) in Fund Once the fund is capital-ized with the investment of LimitedPartners a FMC is appointed who willmanage and operate the fund Sometimesa fund manager also invests some of hisown money in the fundrsquos capital with the purpose to become a stakeholder of thefundrsquos performance Fund Manager
invests in the fund as a General Partner
A FMC charges a certain percentage tothe Fund Investors as a fund deploymentfee is fee typically ranges between
Journal of The Institute of Bankers Pakistan 33
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7232019 Journal of Bankers
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1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
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By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
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Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
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Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
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e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3648
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3748
1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3848
By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4048
Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3748
1-3 of deployed fund Fund Investorrsquosalso agree to share a carried interest withFMC if the actual return of fund exceedsthe agreed targeted returns
FMC deploys the funds in different typesof PE investments through a comprehen-sive investment appraisal process with the
approval of investment committee Invest-ment appraisal process contains thecriteria where a fund manager selects itstargeted sector returns mode of financ-ing tenure of financing with an exit strate-gy e FMC may appoint different legalfinancial and technical advisors depend-ing upon the type nature and size ofinvestment
Types of Private Equity Investments
Private Equity Investments can bedeployed in wide mix of investment typesdepending upon the industry naturetime and size of transactions A mix ofhybrid equity investments can also bemade where an equity is mixed with a preferential debtshares but return onequity is greater than the returns on debttherefore PE investor prefers to invest in purely equity trade Following are the keytypes of investments available to PEInvestors
Venture Capital
is investments in a company which is inthe early stages of development usually
with negative cash flows Typical holding period for venture capital is 5-10 years with the targeted IRR of 30-50 on5-10x cash multiple Risk of capital loss ishigh exit can be availed through strategicbuyer or IPO
Growth Capital
is investments in growing companies which need funds for capital expendi-tures acquisition or to cover a gapbetween working capital Hybridequitydebt can be placed for this catego-ry Typical holding period for growthcapital is 3-7 years with the targeted IRRof 30-40 on 3-7x cash multiple Risk ofcapital loss is moderate as company isalready established exit can be structuredthrough a sponsor trade buyer sale to a
strategic buyer or through FinancialBuyer IPO
Leveraged Buyout
is an investment type where a PE firmacquires the target company with a signifi-cant amount of debt and equity Once thecompany is acquired the deleveraging process is initiated through cash flows ofacquired company to reduce the debtburden as quickly as possible enabling the
increase in the value of company Holding period of LBO is 2-5 years with a targetedIRR of 25-35 on 2-5 times cash multi- ple Risk of capital loss is low
Some other types of investments are alsoavailable for PE Investor namely Mezza-nine Financing Pre-IPO placementDistressed Buyout for corporate restruc-turing or turning around the businesses
Challenges of Private Equity Investmentsin Pakistan
Mostly private equity investments arehuge in size and to locate a strategiclimited partner is a very difficult taskespecially in the context of Pakistan whenthe country is facing internal and externalterrorism and political de-stabilityForeign investors are reluctant to investtheir money in long term investments Iflocal commercial banks act as LP thenthey need to manage their capital adequa-cy requirements as Basel III accord
introduced some higher percentages forrisk weighted assets of unlisted stocksMostly PE firm works with no collateralsas direct participation in equity but highNPL ratio and a prolonged litigation process in country suggests the high riskof capital loss
Despite the challenges a Private EquityPlatform can play a vital role in develop-ment of economy as it operates throughequity participation which reduces theinterest payment liability of performing
company High returns are lucrative forinvestors to invest their money in privateequity A high growth is anticipated forPrivate Equity Market in Pakistan
ldquoThese are
long term
and strategicinvestments
and cannot
be easily
disposed-offrdquo
Journal of The Institute of Bankers Pakistan34
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3848
By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4048
Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3848
By Dr Sabir Ali Jaffery
COMMERCIAL BANKING Problems and Solutions
Q1 e articles of association of acompany requires that the company shallhave minimum four directors and thatthe account of the company shall beoperated jointly by the executive directoralong with one director e company forthe time being has only three directorse executive director of the companyapproaches you to open companyrsquosaccount He maintains that the personnominated as the fourth director is out of
the country at present who is expected tobe back within the next fortnight whenhe will sign the relative documents In themeantime the account may be opened
with the existing three directors with themandate as aforesaid Will you open theaccount Substantiate your answer
Ans e company must have theminimum number of directors as requiredunder the articles of association failing whichit will not be recognized as a properly consti-tuted entity e position may be explainedto the executive director who being a profes-sional himself should appreciate your pleae request of the executor director shouldhowever be politely declined
Q2 One of the joint signatoriesauthorized to operate upon a companyrsquosaccount relinquishes his office Conse-quently another person is appointedagainst the vacancy What fresh mandate
will be required to accept him as anauthorized person to operate on theaccount in terms of the original mandate
Ans Assuming that the outgoing person was an employee of the company a
letter signed by the chairman the manag-ing director or the secretary to the boardcontaining the duly constituted authorityin favour of the new incumbent to operateon the companyrsquos account along with hissignature appended thereon and attestedby the signatory of the letter shall bedeemed sufficient authority
Q3 A private limited company is planning to be a public limited companyIt has completed all the requisite formali-ties and now proposes to issue its sharesto the public It wants to appoint you asbanker to the issue Moreover it desiresthat a running finance facility be extend-ed to it against the security of the share
money thus received What should be your answer to the proposition
Ans Assuming that nothing adverse asto the credibility of the private limitedcompany is in your knowledge there is noharm in accepting the offer regarding yourappointment as its banker to the issue
However any advance against theshare subscription is not advisable for thefollowing reasons
(i)
(ii)
(iii)
e company cannot lay hands onthis money until certificate ofcommencement of business hasbeen issued to it
e company cannot withdrawthis money unless shares have beenallotted to the applicants
Advance against the companyrsquosown shares is tantamount toreduction in share capital whichcannot be made by the company without undergoing its cumber-some procedure
Journal of The Institute of Bankers Pakistan36
BANKING
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4048
Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 3948
Q4 X secretary and Y director of a
company sign a cheque as under
X Y Secretary Director
of XYZ amp Co Ltd
Will the bank be within its right to debitcompanyrsquos account with the amount ofthis cheque If the payment is made willit meet the requirements of payment indue course as prescribed under Negotia-ble Instruments Act 1881
Ans Prima facie the cheque is notsigned in the representative capacity so asto bind the company on it Hence its
payment to the debit of the companyrsquos
account may be tantamount to conversionMoreover the signatories may be held personally liable to the beneficiaries of thecheque as there is no indication that it wassigned on behalf of the company
e payment if made will not beldquoaccording to the apparent tenor of theinstrumentrdquo as is required under Sec10 ofthe Negotiable Instrument Act Hence thebank will not get protection should the payment be challenged
Q5 e mandate to operate on acompanyrsquos account is ldquoby the secretary
with two directorsrdquo Mr Abdul Hayee issecretary as well as a director He along
with another director signs a cheque both
as secretary and as second director asunder Will this cheque be paid
For Electronic Entrepreneur LtdAbdus Sami - DirectorAbdul Hayee - DirectorAbdul Hayee - Secretary
Ans What is required under themandate is that the secretary shall signalong with two directors It means that inall three different officials will jointlyoperate on the account Since this condi-tion is not fulfilled when one and the sameofficial signs twice although in different positions Hence the cheque is irregularlydrawn and will not be paid
Journal of The Institute of Bankers Pakistan 37
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4048
Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4048
Banking
ZAKATin Socio - Economic Development in Pakistan
Contribution of
The research is conducted to comprehensively
describe the evaluation of zakat system in
Pakistan This descriptive investigation leads to
establish a relationship between the zakat
social and economic development The zakat
system creates economic balance in the econo-
my by contributing negative impact on the
concentration of wealth and contributing positive
impact on the circulation of funds This Islamic
mechanism provides positive impacts on thepoor segment of the society on the basis of the
assumption that zakat is an anti-poverty instru-
ment introduced by Islam
he financial obligation that is mandatory in Islam on every Muslimsubject Sahib - e - Nisab (as prescribed by the Shariah) is Zakat euranic injunctions (960 9-103) provides the system for collec-tion of zakat and its distribution e insight of practical implica-
tions of zakat collection and distribution is in the early Islamic history eobjective behind collection and distribution of zakat is to minimize the concen-tration and accumulation of wealth in few hands and al low its circulation in all parts of the economy Its benefit goes to the poor and deprived class of thesociety e economic system of Islam guarantees that each and every individualin the society can atleast fulfil all its basic needs through zakat e second formof charity of Islamic economic system is sadaqat but it is voluntarily not manda-tory as the system of zakat in Islam e zakat system of Islam equip the poorsegment of the society so they can actively participate in the economic activityof the society
By Aysha Noor
Journal of The Institute of Bankers Pakistan38
ISLAMIC BANKIG
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4148
e first objective of Zakat system inIslam is to purify the activities as theProphet (PBUH) mentioned that zakat purifies the wealth Secondly it does notallow concentration of wealth in fewhands but allows circulation of wealthfrom rich to poor segment of the society
irdly the zakat system of Islam is runthrough an organized institute in the earlyhistory of Islam and therefore providessalaries to institute workers Fourthly thezakat system induces the economic justices by collecting zakat from rich anddistributing among poor Although it is athought provoking truth that there aremoral hazards involved in the collectionand distribution of zakat in Pakistan but itis still very effective and active in many parts of the Muslim world Despite these
moral hazards there are millions of rupeesdistributed across the country in the nameof zakat in Pakistan e number of people below poverty line in Pakistanincrease every year despite the number ofsocial and charity programmes of govern-ment and private NGOrsquos
is research is conducted with theaim to comprehensively provide thedescription and evaluation of zakat inPakistan and is significant from the zakat policy makersrsquo point of view that how thezakat system can be better implementedto achieve the socio-economic develop-ment It is also an addition towards theexisting literature as it provides the insightfor new researchers on the relationshipbetween zakat and economic develop-ment
Theoretical Background ofStudy
Nisab and its Contribution in Economic
Development
e practical implication of zakat in earlyIslamic history suggests that zakat isdeductible on valuables like gold silverlivestock treasure trove mines merchan-dise and agriculture produce e currentIslamic methodology of deduction ofzakat from holdings of currency in various forms of financial assets such asbank deposits shares and securities is theoutcome of the Ijtihad known as qiyas
e goods in personal use are not subjectto deduction of zakat such as the houseuse as the residence of the owner andhisher dependents household itemsanimals and any means of transportation
for personal use although there is a differ-ence of opinion on it e agricultureland plant and machinery are not subjectto deduction of zakat Zakat is deductibleon the annual savings of the individuale Prophet Muhammad (PBUH) has prescribed the nisab on different items
and ijma (consensus of jurists) suggeststhat there is no variation from the instruc-tion of the Prophet (PBUH) permissiblee declared nisab for gold is 20 dinars or85 grams of gold and 200 dirhams or 595grams of silver e nisab for the holdingof cash and other financial assets aresimilar to that of the gold and silverHowever with the passage of time the value of silver reduced relative to goldtherefore there is a difference of opinionregarding the declaration of nisab on the
basis of gold or silver e declaration ofnisab in Pakistan is on the basis of golde nisab for agriculture produce is 5 wasq or 950 kg in case the agriculture produced measured in terms of capacityand equivalent value of staple in othercases e type of animal determine thenisab for the livestock For example ifcamels are 5 in number than nisab isapplicable 30 in case of bovine animalsand 40 in case of goat and sheep e earlyIslamic history is silent regardingdetermination of nisab in case of the
minerals e percentage of zakatdeclared by Prophet Muhammad(PBUH) is 25 for gold silver and otherfinancial assets and merchandise eagriculture produce on the land irrigatedthrough rainfall is of 10 and irrigatedthrough artificial mean is 5 edetailed schedule laid down by ProphetMuhammad (PBUH) is applicable on various categories of animals e rate ofzakat on treasure trove is 20 e Islam-ic history is silent regarding the rate of
zakat on minerals however some considerthat it is 25 in case of minerals whileothers say that it is subject to khums of20 e zakat is applicable on all theassets above or equal to nisab and isaccumulatedsaved by the individual forthe whole year Zakat is deductible oncein the whole year while the usrh on theagriculture produce is applicable inharvesting of crop the general consensussuggests that nisab determines theminimum level of holding required forthe payment of zakat Zakat is the source
of poverty alleviation in the Islamiceconomic system It is collected from therich and distributed among the poor andneglected part of the society
Methods Of Zakat Collection And Distribution In Islam
e literature provides insight for the roleof zakat and charities in the modernmuslim states However there is still roomfor further research in the area of zakat as
an Islamic tool for social and economicdevelopment ere are number ofquestions which arise in this aspect such as
The best management of zakat is theinstitutionalization of the Islamic zakatsystem in the early Islamic history wherethe zakat workers are involved in collec-tion of zakat from one segment of themuslim society and its distribution amongthe other segment of the society It isneeded to realize the importance of zakat
as the role of any intermediary service which bring together the buyer and sellerof any product or services Hazart AbuBakr Siddiq (RA) waged war againstthose who denied zakat as the pillar ofIslam Therefore there are still believersthat zakat needs to be controlled throughgovernment intervention Zakat needs tobe clearly separate from other governmentrevenue generating sources such astaxation custom duty and excise etc dueto following reasons
e emergency of Islamic system ofzakat
e contribution of zakat in theeconomic development of Muslimsocieties in past
e role of zakat in present Muslim
society
Is the institutional system of zakatuseful in non-Muslim societies
Zakat is particularly to be distributedamong the poor and deprive segmentof the society instead of any fiscal project no matter how beneficial it is
e zakat rates are determined by theProphet Muhammad (PBUH) and arenot as adjustable to the requirement ofGovernment as the tax rates are(Faridi 1983)
e zakat system is efficient if it isreadily cleared by collecting it fromone segment and readily distributingto the poor segment of society but thisis not true in case of tax
Journal of The Institute of Bankers Pakistan 39
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4248 Journal of The Institute of Bankers Pakistan40
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4348 Journal of The Institute of Bankers Pakistan 41
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4448
n 30 September the CBPSB launched the second inits suite of professionalstandards e LeadershipStandard for Professional
Bankers is aimed at all bankers who areresponsible for shaping culture strategyand policy e standard applies notonly to Chief Executives and seniormanagement but to leaders and manag-ers throughout CBPSB member firmsAs Simon ompson Chief Executiveof the Chartered Banker Institute andChairman of the CBPSB ProfessionalStandards Committee explains ldquoereis no doubt that lsquotone from the toprsquo isimportant but the CBPSB believesthat lsquotone in the middlersquo is equally
important In shaping the LeadershipStandard we wanted to be clear that theconduct and expertise of leaders at everylevel contributes to the customer-fo-cused ethical professionalism that theCBPSB expectsrdquo
e Leadership Standard sets outrequirements for the professionalconduct (values attitudes and behav-iours) and professional expertise(knowledge and skills) of banking
leaders e CBPSB has prioritizedconduct requirements such as develop-ing and embedding a professional andcustomer-focused approach and culture
StandardBEARERMaintaining momentum and strengthening
professionalism ndash the CBPSB publishes itsLeadership Standard for Professional Bankers
consistent with the Chartered BankerCode of Professional Conduct eCBPSB believes that while profession-al expertise is vital banking leaders mustalso exhibit ethical customer focused professionalism in their conduct andtake active steps to encourage theircolleagues to do the same e Leader-
ship Standard begins therefore with theldquohowrdquo rather than the ldquowhatrdquo For exam-
The LeadershipStandard sets out
requirements for theprofessional conduct
and professional expertiseof banking leadersrdquo
Journal of The Institute of Bankers Pakistan42
BOOK REVIEW
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4548
The Advisory Panel was keen to ensure thatthe Leadership Standard would be accessible
to a wide audiencerdquo
ple it describes how leadersrsquo knowledgeand skills are shared communicated and put into practice how ethical decisionsare reached and how leaders challengeand shape the conduct and behavior oftheir colleagues
THE DEVELOPMENT PROCESS
e Leadership Standard is the productof a detailed and rigorous development process including a public consultation which was carried out early in 2014 econsultation asked if the CBPSBrsquosexpectations of banking leaders as setout in the dra standard were appropri-ate who should be in scope and if imple-mentation of the Leadership Standard would help build over time greater public confidence and trust in individu-als institutions and the banking indus-
try overall
Respondents who were drawn fromthe banking industry academia andtraining indicated strong support for thedra Leadership Standard but suggestedadditional focus on customer outcomesand risk management ese were agreedby the CBPSB and incorporated intothe final standard
e CBPSBrsquos independent Advisory
Panel has representatives from academiaconsumer bodies trade associationsconsumer champions and acts as a hub forthe views of a wide group of stakeholdersIt also offered critical advice at each step ofthe Standardrsquos development e Adviso-ry Panel was keen to ensure that theLeadership Standard would be accessibleto a wide audience ndash not just those in
banking or learning and development butto banksrsquo customers and stakeholderseir advice saw the Leadership Standardrefined and streamlined as well as keyelements of the Code clearly articulated
While the Leadership Standard wasbeing developed the regulatorylandscape and the banksrsquo own initiative
to raise standards ndash the Banking Stand-ards Review Council (BSRC) ndash wereevolving e CBPSB has a clear focuson ensuring that its standards comple-ment and where appropriate build onthese and other initiatives e CBPSBhas therefore kept a close eye on proposals emerging from regulatorsincluding the recent PRA and FCAconsultation ldquoStrengthening Accounta-bility in Bankingrdquo (see page 40) anddevelopments from the emerging BSRC
PUTTING THE LEADERSHIPSTANDARD INTO PRACTICE
With the standard published the atten-tion of the CBPSB has turned to imple-mentation Member firms will begin toimplement the standard in January 2015but not from a standing start ndash as thestandard has developed throughout2014 member firms have used thethemes of the standard to help shape and
inform the internal leadership programmes which will be used tosupport its implementation Susan RiceChairman of the CBPSB comments
We do not underestimate the challenge we face Just as it should be the Leadership Standard
is comprehensive and exacting It is both a statementof intent and a detailed pathway to rebuildingconfidence and trust in bankingrdquo
This article was first published in Chartered Bankerthe magazine of the Chartered Banker Institute
CHARTERED BANKERPROFESSIONAL STANDARDS BOARD
= 8 UK BANKS+ CHARTERED BANKER INSTITUTE
BOARD (SENIORINDUSTRY LEADERS)
PROFESSIONALSTANDARDSCOMMITTEE
WHAT IS THE CBPSB
IMPLEMENTATION MONITORING
PROFESSIONAL STANDARDS TEAM
INDEPENDENTADVISORY
PANEL
that ldquoWe do not underestimate the
challenge we face Just as it should
be the Leadership Standard is
comprehensive and exacting
It is both a statement of intent
and a detailed pathway to rebuilding
confidence and trust in bankingrdquoThe CBPSB anticipates that it
will take a minimum of one year to
implement the Leadership Standard
in full with the first implementation
progress review scheduled for 2016
For more information visit
wwwcbpsborg
ABOUT THE CBPSBThe Chartered Banker Professional
Standards Board (CBPSB)
was launched in October 2011
It aims to enhance and sustain
a strong culture of ethical and
professional development across
the UK banking industry by
developing a serious of professional
standards at Foundation
Intermediate and Leadership
(Advanced) levels The CBPSB
intends to help build over time
greater public confidence and
trust in individuals institutions
and the banking industry overall
and enhance pride in the banking
profession
Journal of The Institute of Bankers Pakistan 43
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4648
View on BankerldquoA banker is a fellow who lends his
umbrella when the sun is shining and
wants it back the minute it begins to rainrdquo
Mark Twain
ldquoEveryday is a bank account and time is
our currency No one is rich no one is
poor weve got 24 hours eachrdquo
Christo pher Rice
ldquoIf you want to change the way your
banking system is regulated if you want
to learn the mistakes of whats gone
wrong then you have to change your
governmentrdquo George Osborne
Interesting Quotes
Jokes
The will to win the desire to succeed the urge to reach your full potential these arethe keys that will unlock the door to personal excellence - Confucius
Expect problems and eat them for breakfast - Alfred A Montapert
There is only one corner of the universe you can be certain of improving and thatsyour own self - Aldous Huxley
Do the difficult things while they are easy and do the great things while they aresmall A journey of a thousand miles must begin with a single step - Lao Tzu
Whatrsquos the difference between a tragedyand a catastropheA tragedy is a ship full of bankers goingdown in a storm a catastrophe is whenthey can all swim
__________________________________________
A lady was newly appointed as a clerk in abank The manager of that branch wasfond of Literature and books He asked the
clerkndash rdquoDo you know William Shakespearerdquo
The clerk replied
ndash rdquoNo In which branch is he workingrdquo
Journal of The Institute of Bankers Pakistan44
HUMOR AND QUOTES
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4748
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848
7232019 Journal of Bankers
httpslidepdfcomreaderfulljournal-of-bankers 4848