Business / Pakistan'S Banking Sector'S Industry Analysis

Pakistan'S Banking Sector'S Industry Analysis

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Autor:  anton  29 December 2010
Tags:  Pakistans,  Banking,  Sectors,  Industry,  Analysis
Words: 1295   |   Pages: 6
Views: 894


Banks play very important role in the economy of a country and Pakistan is no exemption. Banks in Pakistan account for 95% of the financial sector. Pakistan has a well-developed banking system, which consists of a wide variety of institutions ranging from a central bank to commercial banks and to specialized agencies to cater for special requirements of specific sectors. The country started without any worthwhile banking network in 1947 but witnessed phenomenal growth in the first two decades. By 1970, it had acquired a flourishing banking sector.

The era of 90s was the climax of privatization, deregulation and restructuring in the domestic banking industry and financial institutions. The Government only owns the National Bank but 80% of bank assets are in private sector. Banking assets rose three-folds over the last five years and the industry size is reaching Rs 4 trillion. The contribution of banking sector to GDP ratio is 55.6%. Pakistan has been ranked 2nd in performance and efficiency indicators among the South Asian countries by the World Bank. There are 68 scheduled banks of which the top five have 50% of the market share. Banking industry, in Pakistan, is currently under a wave of Mergers and Acquisitions (M & As). There are on average 3 M & As per year.

1. Public Sector Commercial Banks: National Bank of Pakistan, First Women Bank Limited, The Bank of Khyber, The Bank of Punjab

2. Local Private Banks: Askari Commercial Bank Limited, Bank Al-Falah Limited, Bank Al Habib Limited, Bolan Bank Limited, Faysal Bank Limited, PICIC Commercial Bank Limited, UBL, MCB, ABL,

3. Foreign Banks: ABN Amro Bank, Al Baraka Islamic Bank, American Express, CITI Bank, Deutsche Bank, Emirates Bank, IFIC, Hong Kong Shangai Banking Corporation, Standard Chartered Bank, etc.

4. Specialized Banks: Zari Tarqiati Bank Ltd., Industrial Development Bank of Pakistan, Punjab Provincial Cooperative Bank Limited


With a growing economy, government initiatives and new players coming in, the Banking industry is growing at a fast pace here. The fixed costs are a major factor in this industry which leads to increased competition. The established players already have a brand identity for themselves in the local market which gives them an edge over the new players. Switching costs for a customer varies but are not substantial. The exit barriers for the banks are low since the fund can be liquidated if need be.

An analysis of the rivalry determinants reveals multiple firms with an uneven playing ground in the banking industry. The products are differentiated in terms of quality of service, lower price, efficiency of managers, etc amongst other things.

The public sector banking, which constituted the backbone, thus continued to suffer because of the small private sector banks size and carried over liabilities. The entrance of western banks which concentrated on the big business, leaving the routine business to the local banks. This reduced the profitability of the local banks.

In conclusion the internal rivalry in the banking industry is high but expected to rise more in the future hence adversely affecting profitability at present.


New channels of distribution (internet, mobile banking) and minimization of legal and regulatory barriers constitute a threat.

The creation of a mix of customer values, including partnering and the existing channels of distribution, should remain barriers to entry.

For a bank to sell its products a large distribution base is an essential component. Large banks with a presence in all key areas hence have an advantage over the others and can sell their product on their own. Other smaller banks have to rely on the services of managers to market and sell their product. This way they can achieve economies of scale and form a barrier to entry for the newcomers.

With regards to entry to the banking industry, the barriers simply do not exist. International players, players from around the world, the GCC, the Middle East; in fact everyone has access to this market , but the entry barriers are a bit high since the capital base of the banks has been strengthened by raising the minimum capital requirements from Rs. 500 million to Rs. 2 billion. This will be raised further in the coming years.

There have also been talks of an FTA with USA and full adherence to WTO regulations going around for some time now. If this happens the entry barriers for foreign banks will more or less be removed. This would mean a far greater influx of international firms entering the market.

From an economic point of view economies of scale (EOS) can pose as a barrier to entry in a number of areas for the bank.

Other factors like the product differences, as determined are low except for the customer servicing hence it is not good for profitability and poses a low entry barrier. The brand identity for banks is substantial and with future talk of consolidation for local banks; this poses a moderate threat to entry. In the long run this would increase the profitability of the firm.

In the end the threat of new entrants to the Pakistani banking industry remain moderate; allowing new entrants who eat away some market share and erode existing players’ profits.


Disintermediation, vertical integration of clients, and e-banking increasingly cerate substitutes for traditional commodities, multi-services and capital market intermediation since the start of the rise of affordable powerful network technology.

Networking with the creation of a mix of customer’s values (low cost, accessibility, technology fit, flexibility, professionalism, diversification in the capital markets, insurance and commodities, etc.) becomes a requirement.

In conclusion the threat of substitutes at present remains low and is not a threat to industry profits.


Identification of suppliers in the banking industry and the power they exercise is also a determinant of competition. The suppliers for the banking industry are mainly:

• IT vendors (hardware/software) providing solutions for banking operations, integrated accounting systems, web based client reporting etc.

• HR – professionals like financial experts and advisors, portfolio managers, etc.

• Investors who are providing capital to the bank, shareholders, government etc.

Investors who part with their capital entrusting these institutions to earn a good return on it have a share according to their investment. Other investors like the government or other banks all have considerable say in the functioning of the bank.

It is the Finance scholars amongst all suppliers have the most differentiated input. They are a concentrated lot and perform the main functions of banking. Hence they hold power in terms of the price and time dedicated to the firm, the makeup of the product and related information for marketing etc. The switching costs are not that high for suppliers in this industry since there are other takers for their products.

In conclusion banks become more dependent on bank suppliers of standardized technology and outsourcing.


The bank product buyers are as important as the suppliers. There are essentially three main buyers:

• General public

• Institutions

• Government

Customer-base of the banking sector is 17% of the total population. The borrower’s of the banks are only 3% of the whole population.

Banks try to bind customers and make them less price sensitive through networking and multi-services which create customer value.

Overall, the buyer exercises high bargaining power and affects the industry profits likewise.



Internal rivalry---------High

New Entrants-----------Moderate


Supplier power---------High

Buyer power------------Moderate

The Porter’s five forces analysis yields a fairly promising picture for the banking industry. The industry is at its growing stage with ongoing developments and a lot of demand. Overall the industry seems moderately profitable with the intensity of competition set to increase. The new entrant hence has to analyze its position wisely. Once big players establish themselves they will affect the smaller players in the market. With no substitutes as such to these products efforts need to be made to further differentiate the products and enhance profitability of these investments.

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