In wake of the financial meltdown that started in 2008, financial institutions were the worst beneficiaries of the global crises. Pakistan also was not spared and economically suffered a supply shock in the form of all time high oil prices which took the inflation to its all-time height to 22%. To manage these shocks Pakistan immediately hurried to IMF for bailout package for more than 10 billion dollars while SBP played its role by increasing the discount rate and other statutory requirement to curb the rising inflation while relaxing the capital requirements for banks. The aftershocks of the global meltdown in 2010 are still haunting the Banks in Pakistan, in shape of detoriation of quality loan portfolio. In 2008 alone the NPL portfolio witnessed an astonishing rise of 64.7% from 218 billion to 359 billion. This increase in portfolio detoriated the banking industry profit by 107 billion, which was 46 billion in excess of 2007, while in 2009, NPL portfolio rosed by 20.3%. The second major impact to the banking industry was the increase in cost of funding which surged from 4.3% in June 07 to 6.2% in June Dec 09 but has come down from 7.2% in March 09. Surprisingly the spreads didn't shrink by dec 09 and remained stabled at 6.8%. The main reason is that the banks are cutting down the rates on deposits to maintain the spreads. On one hand the current deposits are increasing in the industry on the other hand saving deposits are substituting with fixed deposits which intails increases the cost of funds. This shift in the deposits is primarily attributed firstly to SBP incentive policy to mobilize long term deposits through CRR and secondly banks own initiatives to narrow the mismatch of assets and liabilities. And finally the last but not the least is SBP initiative to introduce a floor of 5% on saving deposits beginning June 2008 which increased the cost of funds by 56 bps. In 2010 Pakistan yet again witnessed a new shock in shapes of floods destroying the 70% of agricultural land. The Banking industry is yet to take the impact of these floods which could actually hit the SME sector in a very terrible manner, the impact of which would hit the dec 2010 results. The after shocks of these floods would again trigger the inflation rise to 25% as per the government statistics while IMF's calls for 22% inflation, which currently is standing at 13%. HMB was not the exception to this aftershock phenomenon, but has greatly managed itself to maintain its profits by efficient management of expenses, change of leadership and lowering of cost of deposits. Nevertheless, the rising inflation would again bring in the new economic crises, which would take banking industry towards a point of saturation in terms of deposits and its cost while profits of the industry would be snatched by the rising NPL portfolio. The need is to gather the low cost deposits especially the current and saving deposits, for which there is a dire need to look for segments of customers which could provide such deposits, a white space in the economy. This paper is about highlighting the white space within the downfall economy, for the banking industry and for my bank HMB. Through this paper I would try to identify the underserved segments through which HMB could benefit from it and in turn lower its cost of funds. The paper would highlight the problem as to why there is a need for HMB to get the deposits from unserved segments. Secondly identification of such segments through secondary research data and finally the conclusion.
OVERVIEW OF HABIB METROPOLITON BANK (HMB) Habib Metropolitan Bank Limited (HMB) was incorporated in Pakistan as a public listed company in 1992 under the name, Metropolitan Bank Limited. The bank commenced full scheduled commercial banking operations in October 1992. Metropolitan Bank, from October 1992 to September 2006, remained a highly rated bank and with its nationwide 51-branch on-line network, established as a distinguished provider of trade finance services. On October 26, 2006 Habib Bank AG Zurich's Pakistan operations merged into Metropolitan Bank Limited and the merged entity was named Habib Metropolitan Bank Limited (HMB). Demonstrating a strong commitment to Pakistan's economy, HBZ is the principal shareholder of HMB. HMB operates in all major cities of the country. The bank ranks within top 10 in Pakistan with a strong vision to be the most reliable financial institution. HMB has its primary focus on retail banking and trade-finance and also offers highly innovative e-banking. The group's flagship and HMB's principal, HBZ (incorporated 1967) enjoys international ranking of 687 in terms of capital. With headquartered in Switzerland, the HBZ Group also operates in Hong Kong, Singapore, United Arab Emirates, Kenya, South Africa, United Kingdom and North America. The Pakistan Credit Rating Agency (PACRA) has allotted both long-term and short-term ratings of Habib Metropolitan Bank Limited at "AA+" (Double A plus) and "A1+" (A one plus), respectively. These ratings, being the highest amongst the local sector private banks, denote a very low expectation of credit risk emanating from a very strong capacity for timely payment of financial commitments.
"Based on the foundation of Trust, to be the most respected financial institution, delighting customers with excellence, enjoying the loyalty of a dedicated team, meeting the expectations of regulators and participating in social causes while providing superior returns to shareholders"
5 YEARS OF FINANCIAL ACHIEVEMENTS WITH REGARDS TO DEPOSITS Clearly we can see that HMB has exhaled in the Deposit area from 102 billion in 2006 to 142 billion in 2009 showing a remarkable increase of average 10% each year. The average has gone down due to economic slowdown and in 2008 where it has increased by only 6%. A tremendous increase in 2005 was due to the merger between the HMB and Habib bank AG zurich which has not been considered in deposit growth highlights due to one off situation. As for funding composition the deposit mix decreased from 70% to 60% mainly due to the increase in borrowing mix from 17% to 29%. This main increase in borrowings was due to money market borrowing and SBP export refinance borrowing which both grew substantially.
YIELD ON EARNING ASSETS / COST OF FUNDS / NET MARGIN % The modified ROA is self explanatory whereby it clearly depicts that the ROA is falling due to decrease in PAT margin which is falling to due to high markup expense. This is clearly evident that from the cost of funds graph above and Deposit mix where the Cost is moving from 7.5% in 2008 to 7.9% while current deposits mix fell from 32% in 2005 to 25% in 2009. While the mix of high cost time and saving deposits has grown significantly.
MODIFIED ROA - ROE
HMB ACHIEVEMENT WITH ITS PEERS HMB's yield has improved from 10% to 11.4% however the main concern is the increase in cost of funds which also increased from 6.9% to 7.8%. The increase in yield incrementally contributed towards the 0.4% increase in margin but still HMB is the second last bank among its peers. If we see the deposit comparison HMB has achieved the 6th ranking among the peers while its stands 7th in peers in growth of current deposit. Below is the graph of deposit composition of Current and Saving Accounts (CASA) of the bank. HMB has the 6th largest current deposit composition while is the last in savings and CASA overall. It must be kept in mind that these current and saving deposits actually lower the cost of deposits increasing your margin. We can conclude easily that to succeed in this market and provide shareholders a better return HMB needs to strive and untapped other markets for deposits before other banks comes in and start giving competition. HMB's main priority has been in providing trade finance services which it does and because of this premier reason HMB has been able to develop its current deposit portfolio. However, due to economic slowdown and current flooding crises, the economy would be badly affected by increase in discount rate, inflation which is expected to exceed 20% and higher taxes. All these factors would bring the business situation at a saturation level. It would be this moment when bank would aggressively try to find ways to access other markets which is mainly the adult population of this country. HMB at this moment would have a edge as it would be delivering those segments already and would be a market leader.
IDENTIFYING UNSERVED SEGMENTS A survey was conducted by World Bank during the year 2010, regarding the populations who have access to financial sector all across Pakistan. The extracts of the said survey was analyzed during my research, through which relevant portion were extracted for further analytical process. Due to the availability of authentic and reliable World Bank data (secondary data), extracting primary data was like reinventing the wheel. Strata were built upon the extracted secondary data i.e. population for the research, for accurate and desirable results. The prime focus of the research is to identify the unserved or underserved segments, therefore the relevant facts and figures, were identified, analyzed and then fine tuned according to my desire hypothesis.
KEY FEATURES OF SECONDARY RESEARCH DATA 47% men and 53% women (18 and above) 47% housewives form the single largest group followed by 30% self employed and 12% employed Largely married (71%) and 22% single Mostly (74%) ordinary members of the household rather than the head of the household 63% rural and 37% urban 31% illiterate, 54% with some primary to intermediate education and 16% graduates and above Predominantly in Punjab and Sind
FINANCIAL ACCESS STRAND The Access Strand places the adult population along a continuous usage of financial services, both formally and informally. The financial access strand has four segments, as follows: The "Banked" Those using "Formal Other" financial products and services Users of "Informal" financial products and services, and The "Financially Excluded"
Banked This group comprises of adults who currently use one or more traditional banking products supplied by a financial institution. This is not an exclusive usage category; adults in this group may also be currently using one or more "formal-other" or "informal" products.
Formal Other This group comprises adults who are currently using one or more formal product supplied by a financial institution other than a bank by a financial institution operating under legal governance. Such products include, for example, insurance, leasing, microfinance, postal financial services etc. These people do not have bank account, but have at least one financial service from a regulated non-bank financial service provider. Thus, this is also not an exclusive usage category, as people in this segment may also be using one or more "informal" products.
Informal This group consists of any adult who does not have a bank account or a formal-other service, but uses one or more of "Informal" products that operate without legal governance. Examples include borrowing from a money-lender, shopkeeper or participating in a savings committee. This is exclusive usage - the adults in this segment do not currently use any formal products i.e. "Banked and Formal Other".
Financially Excluded These are those adults who are excluded from all financial services - Banked, Formal Others and Informal. The Banked and Formal Other segments together make up people who are Formally Included. Adding those who use informal services exclusively broadens this group to those who are Financially Served. The latter are financially served in the sense that they are using financial services from either the formal or informal sectors, or both.The remaining adult population, the fourth segment i.e. the Financially Excluded, are the ones who do not have any services from any of the formal and informal sources. They are usually using sub-optimal alternatives or solutions such as sending money by hawala/hundi (informal means of money transfer), saving at home, and borrowing from family and friends.
CURRENT FINANCIAL MARKET SITUATION According to the data gathered people having bank accounts are merely 11% while another formal sector serves only the 1% adult population of our country. This means that only 12% in total is under a threshold of documented economy while the flow of money through undocumented area is 88%. OPPORTUNITY!!!!
ACCESS STRAND ACROSS GENDER The issue of financial exclusion is most severe along gender lines. There are wide gaps between men and women who are banked, informally served and the financially excluded.
ACCESS STRAND BY EDUCATION Clearly, the choice of being banked improves progressively with level of education. However, at the same time informal services are very popular across educational groups, though less popular among those with graduate level of education and above, and very low among the post graduates. Moreover, across all educational levels there are large groups of people who are financially excluded. In fact, more post graduates are financially excluded (22%) than those who are availing informal financial services (9%).
ACCESS STRAND BY PROVINCE The issue of financial exclusion is most severe in Baluchistan (84%) followed by KP (61%). All other provinces have access to some form of financial service, be it formal or informal. In all categories of access Baluchistan lags far behind than other provinces. The access scenario looks relatively bright in AJK due to the earthquake in October, 2005. In order to receive governmental livelihood support, people were required to open a bank account where aid could be deposited. According to one estimate 1.5 million people largely residing in AJK have been affected by the earthquake (Earthquake Reconstruction and Rehabilitation Authority).
FINANCIAL ACCESS SALIENT FEATURES More than half of the adult population that is financially excluded comprises predominantly of housewives and students. The informal sectors is predominantly being used by men with less education and working in low paying jobs in the informal sector, agriculture and daily wages. The issue of access is most pronounced along gender lines. Women by far have less access to all kinds of financial services (formal and informal) as compared to men. Large majority of women are financially excluded altogether. Financial exclusion not only from any kind of formal but also informal financial services is most severe in Baluchistan. There is high co-relation between education and being banked. However, at the same time there are large number of people who are not availing any kind of financial service (formal and informal) across educational groups - even among the graduates and post graduates. Almost twice as many people are banked in urban than rural areas. Otherwise the issue of exclusion and access to formal and informal services is similar in urban and rural areas. Single people tend to be most outside the financial services net (formal and informal) as compared to married and widowed.
FINANCIAL LITERACY The table shows the level of financial literacy among the Banked people relating to the terms that people usually hear and understand. Green highlighted portion refers to the awareness and understanding about very basic financial terms used commonly in the population which generally is high. The light blue highlighted region for the understanding about the financial terms related with the formal financial services which is less than high, but is less among the women. The yellow highlighted portion refers to the sophisticated financial terms understanding which is yet even lower and again women lag considerably behind men. The pink section refers to understanding new rising types of banking among people who are banked, particularly women!
INTEREST IN FINANCIAL MATTERS AND SOURCES OF FINANCIAL INFORMATION A considerable mass of adult Pakistanis is interested in financial matters. Overall 71% follow financial news "sometimes, often and always" rather than never. However, the level of financial literacy among the overall adult population in Pakistan is very low as depicted by the previous table.
The differentiating factors across the four segments show: Banked population relies largely on newspapers and colleagues at work. Financially Excluded and informally served depend on elder brother, father and other family members. The informally served also depend on local community forums like jirga for their information while those in the "formal other" segment depend on shopkeepers. Surprisingly, television and radio are quite on the peripheries across the Access Strand.
AREAS IN WHICH TRAINING IS WANTED BY ACCESS STRAND Training interests of the informally served, financially excluded and those using other formal services revolves around understanding basic money management and financial concepts such as preparation of household and personal budgets, how to save, and how to calculate profit on a bank account. Whereas the banked are only marginally interested in learning about the products offered by banks.
SALIENT FEATURES OF INFORMAL PRODUCT USERS AND FINANCIALLY EXCLUDED
The category of unbanked users having usage of informal products has the following characteristics: Most of them are Self-employed on daily wages within the informal sector. Male has the majority for usage of informal products. This sector contains people having jobs related to: Agriculture; Laborer/Worker for Daily Wages; Self-employed (Formal Sector); Cart Holder/Hawker; Services Selling Workers i.e. Carpenter, Barber, Ironsmith etc Unemployed - Looking For A Job Majority of them are from Punjab and Sind. Informal users are mostly fall in category of married. Education-wise - 4 To 9 Classes, Primary Complete. And lastly they all are from rural area.
The characteristics of financially excluded users are: Surprisingly Female leads this segment in a majority. These females are mostly housewives and singles. Employment Status: Housewife - Earn Income - Yes Employment Status (Single): Student - Earn Income - No Marital Status: Single or widowed Baluchistan and NWFP Education-wise these are Illiterate. Resides in Rural areas.
48% of informal users say that they would like to have their own bank account while 31% of Financially excluded people would like to have a bank account. This means that almost 25 million people of both categories like to have bank account.
WHY PEOPLE ARE UNBANKED? If 25 million of these people would like to have a bank account then what are the reasons that they are still unable to get involve with any of the bank. But before we go deeper into the unbanked people problems we should know why the 11% banked population use bank for: The above table gives solid evidence that banks are being used primarily for the basic and necessity based reasons rather than for any sophisticated, value added and productive reasons. This can be further verified that the percentages for relatively more sophisticated, productive or convenience based reasons such as accessing a business loan, money transfers, earning an income or payment of utility bills have been stated by very few respondents. Further analysis reveals that urban areas are more towards the money safety than rural. Also the rural areas want to be more into the business relation and to access personal loans. Now coming back to the unbanked reasons, the following table gives the right idea: Access related reasons, interestingly, are not the most important reasons for being unbanked, than income related reasons are. Nevertheless people who have cited choice and access related reasons are significant and is a more ready potential market for banks. These segments need to be studied and analyzed closely so that their reasons for being unbanked can be addressed in a more targeted fashion. Contrary to the expectations, socio cultural reasons have been cited by a mere 12% women as a barrier to being banked!
HOW DO PEOPLE RECEIVE THEIR INCOME Pakistan is predominantly cash based economy outside the formal economic structures. 92% of the adult Pakistanis receive their income in cash and almost half of the people say that "some" of this income goes into a bank while 1/3 say that "None" of it is deposited in a bank!
SAVINGS AND INVESTMENTS
SBP CONCLUSION Although National savings as a proportion of GDP increased 40 bps during FY09 to 14.3 percent, the savings rate in Pakistan is the lowest among neighboring countries. Moreover, this minor increase was primarily attributed to the surge in workers' remittances during the year as domestic savings as a percent of GDP declined from 11.5 percent in FY08 to 11.3 percent in FY09. The decline in savings during FY09 is primarily attributed to the sharp reduction in overall economic activities and strong inflationary pressures in the economy.
SALIENT FEATURES OF SAVING AND INVESTMENTS 56% of the total adult population saves or invest either formally or informally. However, 53% save informally while formal savers are only 3%. Saving at home is the most widely practiced across all segments The top 4 means of saving across Pakistan are all informal. Only 8% of those who save do so with a bank. Even though people perceive government associated financial institutions as secure, only 2% are investing in Prize Bonds, and 1% in National Savings Schemes. Almost a quarter of the adult population (23%) saves through Committees. Contrary to expectations, committees are an urban (38%) phenomenon rather than rural (14%) with nearly equal popularity among men and women (about a quarter each)
INFORMAL WAYS OF SAVING USED BY BANKED Even among the banked people, saving at home is very popularamong the banked - across urban and rural areas. Same goes for participation in savings committees, which are more popular among the banked urban rather than the banked rural people. Investments in land and livestock are more popular means of saving among the banked rural and among men rather than in urban areas and among women.
REASONS FOR SAVING There is a lot of overlap as to the reasons for savings, that is why the circle overlap so much It is clear however that the financially excluded and informal save for more essential things than the banked who save for future retirement/holidays etc.
PERCEPTION In thinking about the financial service providers, what come more to peoples mind are the prerequisites for transacting with them rather than their services. The typical service features that consumers seek from commercial banks and other financial service providers have scored low. This reinforces the findings of the focus group discussions regarding weak client service orientation of commercial banks. People's perception about security of money at the banks is high which also conforms to an important reason that the banked have stated for having a bank account. As for informal financial service providers, the top perception statements for committees and money lenders relate to no requirement of documentation, and formalities. This is in striking contrast to the perceptions regarding the formal sector providers. Additionally, more people trust the informal sources as compared to the formal financial institutions. As compared to the formal service providers, relatively speaking satisfaction with the informal service providers is high.
FINANCIAL ACCESS FRONTIER The frontier is a tool used to un-pack areas where opportunity exists to bank the un-banked. The analysis is based on reasons for not being banked although some duplication of response is possible, however the tool gives a good indication of where focus of attention should be. FINANCIAL MARKET DEVELOPMENT FRONTIER So finally now, our frontier tool has identified the unserved segment of the population and that is the informally served segment which is now an opportunity. This segment can be divided into two parts: Market Enablement zone Market Development Zone Market enablement zone is that segment which needs refinement in terms of the perception towards banking while market development zone is ready to serve zone, i.e the bank should start working on the products for such sub-segment to cater their needs. Following table would further strengthen my base of identification:
MARKET DEVELOPMENT ZONE
MARKET ENABLEMENT ZONE
MARKET RELOCATION ZONE (Please note that HMB has its internal policy to serve the urban segment largely than the rural areas and therefore the concentration of services to banked the unserved will be urban area) The distinguishing thing about this informal unserved segment is its saving style which is mostly saved at home both in urban and rural area and which does not goes in the banked economy. Secondly, this segment is more dependent on committee based saving method. Interestingly in both the criteria, female segment has marginally taken lead then males. It is therefore suggested that ways should be develop to cater the needs of the female segment while products should be developed to cater the increasing trend of committees. For example a door step collection scheme should be introduced with periodic contribution or commitment program.
CONCLUSION Constraints to financial access arise from high levels of poverty, with low awareness of information about financial services as well as gender biasness. Technology can be harnessed to help expand geographical outreach and overcome low literacy levels. Physical access can be increased via new technology solutions such as branchless banking and mobile banking. Simplified financial processes and procedures, client segmentation and product diversification can help lower costs and manage risks better. Summing up the whole data analysis, best formula that comes to ones mind is rapid scaling up of access via technology, literacy gains, and financial re-engineering of processes. Client segmentation is one way that would allow institutions to better tailor products to client needs as well as reduce costs and manage risks more efficiently. Suggestions include: Use of traditional saving arrangements and rotating savings, like for example in Philippines family house-holds were provided with Ganansiva Box to save their daily savings; this was called piggy banking. Smaller size products and bulk service to better attract lower income groups. Literacy should not be a requirement to access financial services. Innovative ways to reach customers such as decentralized operations, transaction at door step, mobile units etc. Lastly, REACHING OUT TO WOMEN due to their abilities to better manage debt, their stronger saving patterns and client loyalty present an untapped profitable clientele base for HMB. Understanding women needs more precisely and reflecting those in the financial products would ensure an increase in women's financial.