Banking Industry - Compiled

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    : -ISTORY OF BANKING INDUSTRY PREPARTITION

    -, -Before partition the only bank run by the Muslims of the sub

    continent was Habib Bank which was established in 1941

    - Adamjee with the assistance of Isphanisestablished Muslim Commercial

    Bank a few months before the creation of Pakistan in Calcutta

    - When Pakistan came in to being The HabibBank shifted its Headquarters

    from India to Karachi

    - The establishment of the National Bank of Pakistan in 1950 on the

    pattern of Imperial Bank of India was yet another milestone in the

    .banking history of Pakistan

    - In September 1949 the rupee value was reduced against the Pound sterling which was a major event in

    the.banking circles

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    :ISTORY OF BANKING INDUSTRY FROM 2002 o 2006

    .Banking sector turned profitable in 2002 Their profits rose for the

    . ( . )next five years and peaked to Rs 84 1 $1 1 billion billion in 2006. ( . )Privatization played and important role E g HBL

    .Middle Eastern and European Banks started operations in the country. , ( ), ,E g Barclays RBS ABN Amro takeover Dubai Islamic Bank Emirates

    Global Bank etc

    The State Bank of Pakistan introduced the lowering of discount rates.and a significant decrease in SLR and CLR to increase branch networks

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    On a positive side , he Banking ector of Pakistan has not een

    s adversely i t by the financial cr isis and

    ecession as the Banks in.merica and Europe

    No bankruptcies have been filed as.of late

    ,Only one bank Atlas has asked for a

    merger with KASB bank which happens.in regular environment also

    .There have been no defaulters

    FFECT OF RECESSION

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    :ISTORY OF BANKING INDUSTRY FROM 2007 o 2009

    , %By 2008 80 of banking assets were controlled by the private sector and. , .Assets of all banks showed a net expansion of Rs 4 351 billion by 2007

    .Profitability of Pakistan s banking sector declined sharply in 2008

    , ,Profits of 22 listed banks which have so far announced their results declined by 21 percent to Rs 50 billion in 2008 from Rs 64 billion in.2007

    The 22 banks represent 96 percent of the sector s market capitalization .and constitute 82 percent of the overall industry s total assets

    Interest expense to interest income ratio stood 4 percentage points, higher at 48 percent owing to half year impact of SBP s regulation requiring the banks to give minimum 5 percent on saving accounts

    .deposits

    - , ,Non interest income other than capital gain registered a growth of 35 percent supported by income from dealing in foreign currency

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    Supervisory Framework

    C A M E L S ystem :C C ap ita lA d eq u acy :A A sset Q u a lity

    :M M a n a g e m e n t S o u n d n e ss : &E E arn in g s Pro fitab ility :L Liq u id ity :S S en sitivity to M a rke t R isk

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    d and Supply Factors of Banking I

    a Ahmad, Hibah Shahid, Zahra Millwala, Zainab Ju

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    Types of Banks

    Central bank: State Bank of Pakistan (regulatory role)

    Nationalized scheduled banks: First Women Bank Limited & National Bank of Pakistan

    Specialized banks: Industrial Development Bank,Zarai Taraqiati Bank Limited Punjab ProvincialCooperative Bank & SME Bank (developmental work)

    Private scheduled banks: 27 banks (consumer andcorporate services)

    Services

    Current accountsSaving accountsConsumer loans e.g. mortgages, car loans, micro financing

    Consumer credit: credit cards, debit cardsCorporate credit

    E-bankingIslamic Banking

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    Demand Factors

    Discount Rate Income Economic Conditions

    Recessionary & Inflationary Pressures

    Exchange Rate Risk Conditions of Housing, Mutual Funds and OtherInvestment Areas

    Reliance on Government Securities Lifestyle changes

    Increasing Population Increasing Literacy Rate, Cultural/Religious Values Remittances Security

    Saving

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    Level of confidence in the system

    Need for Consumer Credit

    Credit policy of the bank (collateral, period of repayment, frequency of interest charge)

    Growth in industries; local companies andmultinationals

    Transition towards services

    Power crises and resulting multiplier effect

    BorrowingDemand Factors

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    Supply Factors

    Discount Rate (12%), Reserve Ratio (8%) & CAR (10%) Inflation (11% in 2009-10) Macro-economic conditions (state of industries) Political stability

    Religious views Foreign Investment

    Government regulations & role of SBP

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    Recent trends in the Supply of Banking

    Increased merger & acquisition activity & large expansion of branchnetwork by private banks

    Increased focus towards consumer finance & customer service

    Reduction in the growth rate of non-performing loans

    Internal composition of borrowings changed from unsecured to

    secured borrowings

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    Investment Advances & NPLs

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    References

    http://www.wikipedia.com

    http://www.sbp.org.pk/publications/q_reviews/qpr.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id

    http://privatisation.gov.pk/Finance/Finance.htm

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=634474http://papers.ssrn.com/sol3/papers.cfm?abstract_id=634474http://papers.ssrn.com/sol3/papers.cfm?abstract_id=634474http://privatisation.gov.pk/Finance/Finance.htmhttp://privatisation.gov.pk/Finance/Finance.htmhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=634474http://papers.ssrn.com/sol3/papers.cfm?abstract_id=634474http://papers.ssrn.com/sol3/papers.cfm?abstract_id=634474
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    Muhammad Suleman KhanSana Ashraf

    Samiya MoinMaria Rehman

    Shahmeer Yousuf Khan

    Local and internationaldemand, Pakistans standing

    in comparison with othercountries

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    Local DemandDeposits

    Growth rate lower than required Law and order situation Flight of capital due to the impact of War on Terror

    Increase in absolute amount of deposits due to lack of alternatives SBPs requirement for banks to offer at least five per cent annual return on bank deposits Mobile / Online banking and other facilities Increasing trend in Foreign Currency Accounts

    Weighted Average Deposit Rat

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    Local DemandLoans

    Weighted Average Lending Rates

    Growth in Musharafs Era:CompetitionRelaxed policiesRise of consumer bankingDecline in Growth rate:Effect of the international financial crisisbanks still trying to recover NPLsNo loans being given on property declining real estate ratesRecessionno savingsCollapse of consumer banking

    High unmet demand for Agricultural Loans

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    Other products

    t t

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    nternat ona eman

    Mode of transfer Advantages Disadvantages

    Via Hundi Speedy, lower transaction costs Less reliableBy hand Speedy, no transaction costs RiskyVia formal institutions Reliable, safe High transaction costs, time-

    consuming, formal processes, generallyavailable only in towns

    Pakistan Government introduced a series of measures designed to encourage the use of formal channels including:

    Cost reductions----Pakistani banks abroad have begun offering free-of-costmoney transfer servicesDocumentations requirements have been easedMore favorable exchange rate regulationsIncreased number of bank accounts as a result of large cash assistance

    ro ram of Pak Gov.

    Method June 2006

    Formal Institution 34%

    By hand 24%

    Via hundi 42%

    comparison of the main remittance methods

    rcentage of respondents who reported using each method

    Source: Remittances in crises, a case study from Pakistan by HPG

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    Pakistans standing in comparison withother countries

    Highly affected by recession

    Absence of documentationUnavailability of collateral/security

    IlliteracyUnavailability of collateral/security

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    Pakistans standing in comparison withother countries

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    References

    Mr. Mirza Kashif Baig - BranchManager, Bank Al-Habib

    Ms. Madiha Anwar Nib Bank Mr. Salman Husain Citi bank Mr. Zia Abbas Head Corporate

    Liability, Bank Al Falah Ltd

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    PRICING ANDCOMPETITION IN

    PAKISTANS BANKINGSECTORMir Abdul Wahab

    Naveen YaseenRizwan Mansoor

    Saniya SadaqatSuneel Harish

    Mehek Khalid Rafi

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    MARKET STRUCTURE OFTHE BANKING SECTOR

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    Market Structure

    The banking sectorhas monopolisticcompetition. Butthe big banks havebeen recentlyaccused of cartelformation.

    MCB, HBL, UBL and

    NBP are the top 4banks incommercialbanking. MeezanBank is the largestbank in Islamic

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    COMPETITION IN THEBANKING SECTOR

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    Competition in the BankingSector:

    In terms of attracting customers andgaining market share, competition ishigh.

    Privatization and reduction in thediscount rate has fueled even greatercompetition.

    In terms of deposits, competition is low.

    Competition is also intensifying due tothe minimum ca ital re uirement.

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    Competition in the BankingSector:

    Islamic banks pose a great source of competition to Commercial banks.

    Competition has increased in terms of margins between local and foreign banks.

    Mergers and acquisitions play an effective

    role in increasing competition. Banking spreads are also relatively high

    today(apprx. 7%), which has resulted in

    less competition.

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    Competition in the BankingSector:

    The CCP had issued show-casenotices to banks, questioning theircollective behavior in theadvertisement and theirinvolvement in fixation of spreadsand interest rates on different

    products.

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    PRICING IN THE BANKINGSECTOR

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    Prices of Banking Servicesin terms of Personal Loans:

    HabibMetropolitanBank:

    For a salariedperson, up to 3years 22.32%.

    For abusinessperson,up to 3 years25.31%.

    Min Loan= Rs.25,000

    National Bank of Pakistan:

    Max repayment

    period= 5 years Mark-up Rate=

    17.5% Max Loan amount=

    Rs. 490,000.

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    Prices of Banking Servicesin terms of Personal Loans:

    MuslimCommercialBank:

    Speedy loanapprovals

    Max amount= Rs.1,000,000

    Tenure is from 1 to5 years Loan amount can

    be renewed after

    6 months

    United Bank Limited:

    Speedy loanapprovals

    Min Loan Amount=Rs. 50,000

    Max Loan Amount=

    Rs. 500,000 Tenure is from 1 to5 years

    Complimentarycredit insurance.

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    BANKING INDUSTRYMICR0-ECONOMIC

    FACTORS

    ANALYSIS OF PAKISTAN INDUSTRIES

    :COURSE INSTRUCTOR.MS HAMEEDAH SAYANI BBA IV

    SPRING 2010

    GROUP # : 05GROUP MEMBERS:AASMAH MOHTASHIMAISHA YOUSUFHUMERA ALTAFMEHAR HAIDER ALI

    TASKEEN LAKHANI

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    Labor in bank Before reforms, a bureaucratic structure and a govt. Office environment. bank reforms improved HR in banks in terms of recruitment (transparent

    and merit based) privatization -more dynamic and competitive Emphasis on equal gender employment opportunities and increased staff

    strength of female employees in line with this strategy, we have female employment rate of 11.2 percent

    of the total employees of the bank from just 4.4 percent in the last five

    years. Mohammad Aftab Manzoor, CEO, Allied Bank Limited (BR) greater share of women customers who feel theyre neglected by the

    patriarchal members of banks Emphasis on skilled -trends towards a productive workforce as revenue

    per labor increases. Limited labor also means increased dependence ontechnology

    Training periods offered by various banks employee turnover in the sector has decreased

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    TECHNOLOGY

    O n lin e an d in te rn e t B a n kin g (ATM s sh a rin g o f in fra stru ctu re a m on g st d iffe ren t

    )b a n k s ( . .M ob ile B an kin g ea se a n d com fo rt M e rg e rs S h a red

    )in fra stru ctu re w ith o th e r in d u strie s h e lp exp a n sion

    , (C re d it ca rd s S m a rt C a rd s a n d D eb it C a rd s secu rity)issu es

    Benefits to customersReduction in transaction Cost to banks

    ( ):IT Developments in Commercial Banks examples- ,NBP core banking application to enhance efficiency

    customer service and facilitate launching of new.services

    - ( )MCB mobile service shared platform approach so that all banks and mobile operators deliver service with

    TECHNOLOGY SBP

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    TECHNOLOGY SBP

    Introduction of Real Time Gross Settlement System tofacilitate transfer of high value funds

    Upgradation of Globus, ERP and Data Warehouses Maintenance of SBPs both internal and external

    website

    Data service monitoring system set up based on SMSalerts

    Applications developed to assess performance of IThelp desks

    Video Conferencing set up is being used. Disaster Recovery Site has been established. Proof of Concept for Laptop Encryption completed automated vulnerability management system intrusion detection and prevention systems

    Capital And Resources

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    Capital And Resources MCR of Rs10 bn by end of 2013 MCR for the year ended December CY09 was Rs

    6.0 bn MCR for the year ended December CY08 was Rs

    5.0 bn 23 banks including 6 foreign banks are fully

    compliant with the minimum paid-up capitalrequirement (MCR). Rest of the banks are inthe process of meeting the MCR eitherthrough fresh capital injection or throughmergers and acquisitions (CY 08)

    CAR at end-CY08 12.3% (MIN. REQD: 09%) 3 CBs fell short of minimum requirement- 2 have

    their CAR at 7% 24 of 40 banks had their CAR over 12% at end-

    CY08- well capitalized banks Structure of funding: (09)i. Equity: 662 bnii. Borrowing/debt: 659 bn equity of the banks increased:3.4%, during CY08

    to Rs 563bn (a satisfactory rise of 40.2bn eventhough < CY07)

    Other Resources

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    Other Resources Strong growth of the asset-base (CY09) Loan portfolio grew by 18.4 percent to Rs 3.2

    trillion by end CY08 (diversification of credit)

    banks continued to invest heavily ingovernment papers and bonds of PublicSector Enterprises (PSEs). (CY08-CY09) b/c

    i. building up of circular debt (from CY08)ii. inflationary pressures pushed the real lending

    rates into the negative territory (pvt.

    Sector) deposits base showed the signs of recovery(CY09)

    Banks deposit base, inextricably linked tobanks liquidity position, grew by 9.4%during CY08 [annual average growth of 18.1% during CY03-07]

    sharp decline in the liquid assets to total assetratio to 28.6%(CY08) as against 33.6 %(CY07)

    Liquidity Problems b/c of:1 deposit withdrawals2 low confidence in the overall economic

    position of the country3 the spillover impact of the international

    Others: NPLS

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    Others: NPLS

    NPL as a sign of asset quality Witnessed rise of 64.8% during

    CY08 to Rs 359.3 billion adverse impact on the financial

    performance-required banks tocreate provisions amounting toRs 105.9 billion during CY08

    Caused by1 driven primarily by cyclical factors2 rapid credit expansion in recent

    years (CY03 to CY07).3 Structural weaknesses4 Within the corporate sector, NPLs of

    the textile sector at 18.8percent stand out particularly.

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    references

    Business recorder State Bank Of Pakistan Publications

    (graphs and stats):

    1 Financial stability review 2008-20092 Quarterly performance of the banking

    system

    3 First Quarterly Report 2009-201045

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    MACROECONOMIC FACTORSAFFECTING BANKING

    INDUSTRY OF PAKISTAN

    Presented by : Afrah ZubairMaryam SultanaMuneeb Siddiqui

    Rimliyah TariqSaman KhanShoaib Abbas

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    INFLATION

    Is inflation bad for the economy? Notalways

    Beneath some threshold, higher

    inflation might actually lead toincreased real economic activity

    3 to 6 percent of inflation has positive

    effects for Economy of Pakistan.(Khan, 2005 and Hussain, 2005) Encourages investment Encourages Production Allows growth in wages

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    INFLATION However, when inflation crosses reasonable limits, (3-

    6%) it produces negative effects. It reduces the value of money, which is the medium

    of exchange This results in uncertainty of the value of gains and

    losses of borrowers and lenders as well as buyersand sellers- discourages savings and investment

    Also investors demand a higher interest rate toconsider lending their money for more than theshortest term to preserve the "purchasing power"of their money.

    Savings are discouraged as inflation reduces the realrate of return on financial assets.

    Increases the divide between the rich and the poor

    For Pakistans Bankin Industr , inflation can have ne ative

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    INTEREST RATES

    Spread between assets and liabilities causes earnings for Banks. (Interest rates they provide and take).Modest and gradual change in interest rate has only minor impacts on most bank interest margins.Economic growth and expectations of borrowers plays aneffective role in determining interest rate policy.

    Higher inflation is associated with a growing economy.Federal Reserve increases interest rates to slow theeconomy down and reduce inflation

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    TECHNOLOGY

    Online banking / E-banking Payments, Transactions, Inquiries etc

    through ATM, credit cards and internetbanking

    All cards with Visa and Orix logo can beused anywhere on internet forpurchase there are a lot of banks isPakistan issuing credit cards, evendebit cards with Visa logo

    UBL wiz card is first Pakistani Debit Cardthat can be used on internet forpurchase.

    Mobile Banking Sms bankin

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    TECHNOLOGY

    Recent advencements ? Tameer microfinance bank Easy paisa (Telenor) The State Bank of Pakistan is

    considering introducing a newnon-bank led and Telco ledmodel of branchless banking

    To promote, the lowest cost of allmobile money transaction around$0.08 per transaction

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    Environment

    Mixed macroeconomic conditionsI. The exchange rate continues to depreciate

    despite economic recovery and a reduction inthe current account deficit.

    II.The lending rate has reduced in recent quarterson account of decrease in discount rate.III.The CPI rate (measured on year-to-year basis)also declined significantly in recent quarterson account of low food inflation.

    Improved credit ratings and decrease in the growth of Non performing loans (NPLs) due to slightlyimproved economic conditions.

    Exposure of banks towards risk from bankoperations and failures in controlling theenvironment and the systems of banks (due toincreased competition and regulations) resultedin the banking system reporting 758 fresh casesof fraud and forgeries, which are higher than

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    Group 7v Haseeb Shahidv Jawad Farooqv Maha Khanv Syeda Maryam Anisv Syed Muhammad Hamza Arif

    POLICIES & REGULATIONSINCENTIVES

    TAXATION

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    POLICIES

    Policy on Non-Performing Loans Refund of unclaimed deposits

    Policy on bank charges Policy on issuance of Rupee Traveler Cheque Policy on termination of persons involved in

    fraud, forgeries and disciplinary actions

    1

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    REGULATIONS

    Deposit Insurance Company (DIC) Function: increase liquidity, stability

    & competitiveness DICs being strengthened to avoid

    bank insolvency SBP & SECP to have a timely check SBP providing relief by direct

    minimum payout at 5% per annum Scope of DIC

    2

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    INCENTIVES

    Substantial investment needed in

    agriculture sector Agriculture sector is very risky banks

    are reluctant to give loans The SBP needs to come up with

    incentives to secure repayment of

    agriculture loans SBP has initiated The Microfinance

    Credit Guarantee Facility 40% of funds insured

    3

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    TAXATION

    According to the budget 2009-2010: Taxpayers are entitled to

    compensation @ 6% (late paymentof refunds)

    Rate of compensation is beingincreased to 10% per annum

    Facility to claim deduction onaccount of provisions of non-performing loans restored.

    Additional tax is chargeable @ 15%4

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    TAXATION

    Levy of FED on fund services provided bybanks The rate of default surcharge higher than

    the interest rates of banks to avoidshort filing by the taxpayers,KIBOR+3%

    The Federal Value Added Tax Act 2010 Restrictions on input tax deductions Recovery or payment of tax- Where

    any amount of tax is due from anyperson, the officer of Inland Revenueauthorized by the Board orCommissioner in this behalf, may take

    any of the 2 actions5

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    Banking Industry

    SWOT AND PESTPresented by : Junaid Hemani Jane-Ali Abdul Nabi

    Mustafa AzharMahzaib Aziz Memon

    Rizwan Rafiq

    Instructor : Ms. Hameeda Sayani

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    SWOTInternal

    STRENGTHS WEAKNESSHigh profitability Corruption in recruitment system

    Huge market size Lengthy processes of credit

    approvalCapital Intensive NPL ( Non-performing Loans)

    Easy accessibility for customers Lack of awareness creation projects for the use of credit cards

    Capital Intensive Low borrowing ratio

    Educated Manpower Lack of RnD

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    SWOTExternal

    Opportunities Threats

    Islamic Banking Economic Slowdown

    E-banking Political Instability/securityMobile Banking Weak Database(NADRA)

    Micro-finance Interest rate and Exchange risk

    Mortgages High competition

    Technological Advancements Money laundering

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    PEST

    Political SocialPoliticized recruitment Saving Ratio is less

    No mergers and acquisitionsdone by Government ( JPMorgan)

    Distribution of Income

    Political Instability High population (youth)

    Loans approved because of political pressure

    Religious point of view over interest rates

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    PEST

    Economic Technological

    Growth rate expected to inc. Research and Development

    High discount rate Automation Systems

    Exchange rate Banking softwares are obsolete

    High inflation but has reduced inthe last quarter

    Centralization

    1

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    DIAMONDDIAMOND

    MODELMODEL

    D EM A N D FA C TO R S

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    D EM A N D FA C TO R S

    - Attractive return on Investment(13.5%p.a)-Secure to invest-Islamic Banking-Diverse banking products (car financingloans, Student Loans, Mortgage Loans &Retirement Plans)

    -Attractive features for A/Cholders(internet banking , phonebanking, sms alerts,etc)-Mechanization/Modernization

    in agricultural sector(Zarai

    2 RELATED OR SUPPORTING

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    RELATED OR SUPPORTINGINDUSTRIES

    :Telecom industry Mobile banking.eg MCB

    :Auto industry Car finance.eg Suzuki auto

    finance :Housing Finance :Insurance industry

    .Eg Takafulinsurance

    :Corporate Sector Form ofLoans

    3

    http://www.mcb.com.pk/mcbmobile/
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    :STRATEGY Aim to become leading financial services

    ,provider partnering with their customers for a

    .more prosperous and secure future

    Banks also aim for increasing investors confidence by providing a wide array of

    services and products Increased profits and market share

    :STRUCTURE rgani zed s truc tu re ublic sector 4 - slamic 5 - rivate 20 -

    -oreign 7 -evelopment financial institutions 8 pecialized banks 4 - -icrofinance 6

    :COMPETITIONMonopolistic competition , ,Foreign banks were and still competing mainly with the five

    .big banks - , . . -Foreign banks are making huge investment in tec hnology i e on

    , , ,line banking ATMs credit cards etc

    GOVERNMENT

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    .1 REGULATIONS On site and Off site inspections are being made by the.central bank of Pakistan

    A new department NBFI was setup for supervision and.inspection

    .2 DEVELOPMENTAL Role ,Rehabilitation of financial institutions directing the.use of credit and providing subsidized credit

    3.COMPETITION The Competition Commission has strict vigilance on the

    competition among various banks so that the consumers.do not get exploited

    GOVERNMENT

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    Porters Five Forces The Banking Industry

    Group Members:Fahad FerozKhadijah ArshadMuhammad Ali Hemani

    Muhammad Haroon SiddiqiReena KirmaniWajiha Khan

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    Barriers to Entry - High

    High Economies of Scale High Capital Requirement Some Product Differentiation

    Brand Name Small Incentives Innovative Products

    High Tax Rates High Exit Barriers Complex Laws & Regulations

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    Threat of Substitutes Low

    Non-Banking Financial Institutions Company Financing/ Leasing Money Transfer Services

    Bargaining Power of

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    Bargaining Power of Customers

    Large Customers (Companies &HNWI): High Bargaining Power

    Better-informed, professionallymanaged funds

    High Switching Costs Multiple Investment Options Multiple avenues for raising capital

    Bargaining Power of

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    Bargaining Power of Customers

    Small Customers (Retail Customers):Low Bargaining Power

    Low Awareness about availableoptions and ability to comparethem.

    Limited Accessibility

    High Switching Costs Price Fixing and Deceptive Marketing

    Practices

    No depository insurance.

    Bargaining Power of Suppliers

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    Bargaining Power of Suppliers -Low

    Depositors Inter-Bank Lending Technology and Other Material

    Rivalry Among Existing

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    Rivalry Among ExistingFirms - High

    Numerous Competitors Slow Industry Growth Lack of Product Differentiation High Switching Costs Diverse Competitors

    High Strategic Stakes Herfindahl Index