BR Research: What is HBL's strategy in the present times of economic uncertainty? Sultan Ali Allana: We are optimistic on the long-term outlook, given Pakistan's resources and the room for tapping the economic potential. There may be short-term issues; however, the future of banking in Pakistan appears positive.
HBL will continue to move forward on its growth trajectory and is now well poised to pursue financial inclusion in all aspects on the asset side as well as the liability side, and also in ancillary businesses, such as insurance and asset management. To progress as a nation we must think in terms of financial inclusion and HBL is developing a particular focus on financial inclusion.
Profitability is important for us, but financial inclusion is paramount; as the largest bank with an extensive branch network that has a presence in the remotest regions of Pakistan, HBL is obligated to deliver financial products and solutions for the benefit of the entire spectrum of society. This is integral to the future growth of HBL.
In my opinion, HBL's focus on financial inclusion may not result in higher returns, but I think it is our moral obligation to work for the betterment of the people - as such, we are fully committed to this. We would like HBL to be judged not on the basis of our earnings and returns, but on what we deliver to the society and people.
BRR: Is this the philosophy of the Aga Khan Fund for Economic Development (AKFED) or the government shareholders?
SA: AKFED is a fund, which invests in emerging markets and its role is to promote economic development. Financial inclusion is very much part of our strategy. Having said this, I would also say that this objective is at the core of the government's thinking as well; the SBP has long been urging for more and more people to be included in the banking network. Watan card is one such step in that direction.
BRR: What measures are you taking to include people from far-reached areas into the financial hub?
SA: HBL's network coverage with over 1,400 branches reaches even the most rural population in the country. However, the success of this outreach is that people also should use the banking system - this is critical for its success.
It is also important to reach out to people in the urban areas, particularly those in the low-income brackets. We are constantly reviewing our branch footprint and are conscious of our role. Going forward, we intend to set up new branches where necessary. In addition, Alternate Delivery Channels (ADC) are being actively pursued as a strategy in order to enhance our coverage.
BRR: Since these people may not be well-versed with technology, what level of education and training will be needed to achieve this?
SA: The "training myth" has been eliminated by the outreach achieved by the telecom firms. When telecom came, everyone wondered as to how they would operate across the spectrum of the population. Now nobody questions this. People are using cell phones to top up their accounts, send SMS's, obtain education and medical assistance etc. Some are now also using mobile phones for fund transfer purposes.
It is true that product offerings and solutions will have to be made simple, but if you make the product user-friendly, people will use it. Case in point: Watan card - people are using the cards. Making the product simple and user-friendly can help bring about financial inclusion.
Technology, in our view, will play a key role - this will enable banks to deliver products and solutions widely and effectively. Making branches and customers' experience efficient and user friendly is also important - we have started a process where we have engaged female staff as tellers in some of our branches.
This measure has resulted in a greater flow of female customers to the branches, as they felt comfortable in transacting with female staff who are well-trained and knowledgeable.
BRR: Let's talk about the SME sector. Banks are currently concentrating on big corporations, and that has somewhat crowded out of the SME sector. How do you propose to address this issue?
SA: SME is a complicated topic. The phrase 'SME' needs to be reviewed - this is a very wide term. To explain, micro-banking starts at, say, a Rs5000 level up to, say, Rs200,000-Rs300,000. Technically, the SME spectrum should start after that and continue up to where the corporate sector begins.
Banks interpret the category differently, and have varying limits for the 'S' part and the 'M' part in the SME spectrum. Some will start SMEs at one level and end at another; some will start at a lower or higher level etc.
If you do a survey of banks on their limits of 'S' and 'M' and you will most likely get very different answers. For some 'S' begins at Rs5 million and ends at Rs30 million, for others it begins at Rs1 million and ends at Rs10 million. I feel that this wide definition creates some confusion and perhaps creates gaps, which essentially do not get financed. We need to, therefore, develop an industry-wide definition of each segment, so that the banking industry is able to provide coverage to the entire spectrum.
BRR: In your opinion, how would you define the 'S' segment?
SA: Technically, the 'S' should start where the micro tapers off. The banking industry as a whole are not in this segment in a meaningful way - HBL is working towards providing credit to this segment in a systematic way.
Most of the large banks in Pakistan, in my opinion, are what maybe termed as "SME" but are essentially positioned in the 'M' segment; starting from the mid-M to the high-M. They're not on the lower side of the range either. For us to be able to cover the entire spectrum, we have to also cover the lower side of the range.
While there are limitations, or perhaps constraints, in the 'S' area, e.g., one is essentially without any tangible security or collateral in the 'S' side and the lower end of the 'M' side, we will have to find innovative ways to address this limitation. Otherwise, on a national level, we may not be able to fully address the needs of this segment. There are also issues of security and of credible financials and also, many times, lack of a proper recovery process.
BRR: Can you elaborate on the situation of collateral in the S part of SME?
SA: In our economic spectrum, a person may not have business related assets but they may have personal assets such as residential property or land. In other countries, such form of personal collateral is used - enforceability is key - if processes and systems are strengthened to enable quick and timely enforcements, banks may be comfortable in lending.
Another aspect, which may contribute and facilitate in the development of the "S" and the lower-end "M" segments is the availability of venture capital. Unfortunately, we don't have institutions in the country which offer this form of support.
BRR: What are your views on the synergies between NJI and HBL?
SA: There is excellent synergy. Today, through collaboration, we are offering services, which we couldn't in the past, e.g. life and health insurance to our customers. In future, we hope to be able to bring other quality of life products, e.g. educational insurance. We don't have them yet, but we're looking into them actively.
BRR: You have a presence in many countries. Where are you planning to expand next?
SA: We have a sizeable presence in the Gulf where we have branches in the UAE, Bahrain and Oman - so Gulf is a very important cluster for us and we will continue to expand in this region. We have a solid presence in the UK and that presence will grow because we are embarking on inorganic growth. The 3rd cluster is South Asia, which includes Bangladesh, Sri Lanka and Maldives. Here, again, we are growing.
In addition to these clusters, there are some high-growth markets that we've identified; one being Central Asia and the other being Africa. Our presence there is not in the form of HBL but through shareholdings in other major regional banks. These again are high-growth areas and we intend to further solidify our position in the coming years.
BRR: Do you plan to expand your insurance business as well?
SA: We are looking at expanding our insurance in the emerging markets. South Asia is of particular interest to us. We're also looking into Central Asia as there is market demand.
BRR: Any plans of venturing into private equity funds?
SA: We've been thinking. There was a time when we were at an advanced stage with international financial institutions for launching an infrastructure fund, but the project did not move forward because of the global economic challenges. So, yes, when economic conditions are better and there is growth, we might look into it.
BRR: Any plans for acquiring banks in Pakistan?
SA: Not at this point in time, although we are always open to examining opportunities when they arise. We have a fairly large presence and are achieving reasonable growth - so there is no rush or compulsion at this stage.
BRR: But you were looking at RBS?
SA: We looked at it and then decided it was not a good fit for us. As I have said, we will look at opportunities, but we'll evaluate if they add to our franchise value. We looked at RBS, and we came to a conclusion that it did not add value to our franchise and so we did not pursue it further.
BRR: HBL has a stake of about 16 percent in the Khushhaali bank; do you wish to increase your presence in the microfinance industry?
SA: Micro banking is an integral part of financial inclusion, and as the largest private bank in the country, we cannot leave it out of our portfolio. My personal view is that in the long run, i.e. in the next 4-5 years, we would have to look at this in a serious manner as this is very much a part of financial inclusion. I think that as the country's largest bank, we cannot stay out of it, but, again, this is my personal opinion.
BRR: What about acquiring one?
SA: At some stage, we will have to look at this issue closely - our direction is financial inclusion and this is an integral part of financial inclusion.
BRR: What are your suggestions for increasing the savings rate in Pakistan?
SA: One way is financial inclusion. The other is documentation of the economy. If you document the economy, savings will most likely grow. Innovative products to fit different profiles is also essential.
BRR: Why isn't your penetration high on the mortgage side?
SA: I think the laws in Pakistan will have to be far more enabling to bring about an advancement of mortgage financing in the country. The process of repossession must be swift because banks will only lend if they are comfortable that the banks will be able to recover in case of a default.
Another aspect is that you will also need sources of long-term funding to support mortgage financing. In the absence of strongly enforceable foreclosure laws and long-term funding, it may also be difficult for the mortgage industry to develop in a meaningful manner.
BRR: But why aren't you aggressive in car financing or credit cards either?
SA: We are there, but not very aggressively. We are risk-averse, being cautious bankers. We will do business, but are cautious in our appetite for risk.
BRR: What is your view on the trend of NPLs?
SA: My sense is that the banking sector NPLs have bottomed out now. The trends indicate that the quantum of NPLs is likely to become lower going forward. That's what the trends are indicating.
Profile: Sultan Ali Allana
Currently working as the Chairman of Habib Bank Ltd, Allana has been with the bank since it was privatized in February 2004. Prior to this position, he was the Chief Operating Officer of NIB Bank and a Director and founder member of Global Securities Pakistan Ltd.
Allana, who has over 25 years of experience in the finance and banking industry, also serves as a Director on the board of the Aga Khan Fund for Economic Development (AKFED) and is the Head of the Financial Services Group, which oversees AKFED's holdings in banks, non-banking financial institutions and insurance companies in South Asia, Central Asia and Africa.
Since 1997, Allana has served as a Director of the Tourism Promotion Services Pakistan Limited, the owners and the operators of the Serena Hotels in Pakistan and has served as the Chairman of the First Micro Finance Bank until 2006.
He holds undergraduate and postgraduate degrees from McGill University and the University of Wisconsin in Engineering and Management.