Consumer boom was a disservice to society - An interview with Sirajuddin Aziz, CEO, Bank Alfalah Limited

In his conversation with BR Research, Aziz laments the consumer-led economic boom of the yesteryears and stresses on the need to make sacrifices to ensure long term growth in the country. Sharing his growth strategies for the bank he leads, Aziz talks about his focus areas, and his plans to increase presence by expanding branch network as well as by venturing into branchless banking. Below are the edited transcripts.
BR Research: What do you reflect when you look back on the consumer boom that saw a hard landing in 2008?
Sirajuddin Aziz: During the economic boom, the growth in consumer banking was out of step with incomes that largely remained stagnant.
Households that did not have air conditioners started buying split units and other luxury items. So the boom in consumer banking, on hindsight can be referred as a disservice to society. Though the model that Pakistan followed had been successfully implemented earlier in much of South and North East Asia but Pakistan's case was different.
We believed that if we start selling Rs1 billion worth of mobile phones, or for that matter automobiles industry, other peripheral industries would prop up to support the main industry. But the development of industry to support that growth didn't occur. As a result, we continued importing the goods, to the impairment of the economy.
And coupled with that there were many unscrupulous elements in the society that benefited from the fact that the economy was not fully documented. We did not even have a proper credit information bureau at the time, and as a result many people borrowed much beyond their repayment capacity.
Today we have scaled down the business to about one-tenth the size it was in 2005-2006.
BRR: How did it affect Bank Alfalah's business and what's your strategy going forward?
SA: In 1997, Bank Alfalah was the 38th bank of the 42 banks. Our strategy was to grow organically to become a leading player in the market. Our sponsors supported us, and now we have become the 6th largest bank in the country. And the intention is to remain within the top 5 banks in the next five years.
We initiated consumer banking with focussed attention. The segment suffered greatly between 2007 and 2009. But that was a result of shrinking disposable income in the market.
We are the market leader in the credit card business. We were the first to introduce no joining or annual fees, so we became the obvious choice of the market. But our portfolio has now scaled down from Rs9 billion to Rs7 billion.
The default rate on credit cards, according to Visa, is about 23 percent, and in Pakistan it's about 16.5 percent. And in comparison to the rest of the market, we are doing about 13 percent. We do not see the same growth as we saw in previous years; issuance is far and few, and our concentration is on recovery and rescheduling.
Similarly, mortgage lending is stagnant; we haven't seen any growth in this product in 2010. At the most, fresh advances are no more than the inflows that are coming in from repayments. Overall, at the peak in 2007, we had 23 percent assets in the consumer segment of our loan book and it has now fallen to 17-18 percent.
BRR: What steps can be taken to develop the industrial base that was supposed to be created by the credit led growth?
SA: My personal recipe is of a different kind, one that will be unpalatable for politicians and the people alike, because it begins with sacrifice. No country moves forward without it. At least one generation will have to sacrifice. Two generations of China didn't know where the world was, and now the country is reaping its rewards.
From a practical stand point, an economic vision for the country must be established that is shared by all political parties and is representative of the people's wishes. Organizations grow because there are small milestones along the way that are achieved.
There was a point in time when all economists believed that only countries endowed with natural resources will succeed. That theory is out of the window now. You are looking at knowledge economies now. Now, countries that are progressing are the ones that have a focus on education and knowledge.
BRR: What are you growth strategies in this environment?
SA: We will continue to focus on the consumer segment, however, consumer was never and nor it is now our bread and better. Our mainstay is corporate banking and lending to the SME sector.
And then we are looking towards trade finance, not just domestic but also foreign trade. We undertake consortium financing of infrastructure projects. We can't do that alone, and I believe that no bank other than state-owned banks have the muscle to finance development projects on a stand-alone basis.
BRR: How do you define SME; do you feel focussing on the S of the SME is a good idea?
SA: That's a good strategy for the nation, but for financial institutions a blanket statement may not be appropriate. For example, I don't think Bank Alfalah can go anywhere below the small sector. Matters of documentation are critical to doing business with small businesses.
For us small businesses are entities above Rs2 million revenue and medium sized enterprises are Rs50 million plus. Anything below Rs1 million lending, from a commercial bank's perspective, would be microfinance, and we have specialized institutions for that in Pakistan.
BRR: BAFL has a significant presence in the Islamic Banking space, what are your plans in that area?
SA: We are the second largest Islamic banking window in the country. And we had every intention to convert our Islamic window into a full fledged bank. In fact, we engaged SBP on this, and got permission to do so.
But market conditions have changed so much that we want to wait until the economy is better. We feel we can get a better return on it then.
BRR: Can we expect BAFL to become aggressive in the agri sector?
SA: I don't think we'll become aggressive in the agri sector but only more cautiously because our experience has not been very positive; default rates are very high in rural areas.
Agri sector in Pakistan is a difficult sector - difficult to lend because there is very little documentation. Again, if you look at private banks, we have lending of about Rs6.5 billion on the agri side. So in our peer group, medium sized banks, we are in the lead as far as agricultural lending in concerned.
BRR: What do you think needs to be done to document the rural sector, so that banks can lend to the farming industry?
SA: Tax agricultural income. It will become documented and banks will be able to lend. Eventually corporate farming will take a hold and lending to the agricultural economy will flow.
BRR: How will the country finance long term infrastructure projects, now that DFIs are slowly reducing in significance?
SA: Commercial banks by their definition of doing business should not be involved in long term financing. The problem is that DFIs have entered the domain of commercial banks, whereas, since they are backed by government funds which are long term in nature, they should invest in infrastructure and development projects.
The regulators must step in and enforce the role of each institution. Unless that is done, commercial banks will find themselves financing long term projects, which in my view is suicidal because it is based on short term deposits.
We must use institutions for the purposes they were created for. Public sector banks that are the beneficiaries of government funds should be investing in long term projects. But if market participants expect private sector commercial banks to take a lead in this area, I think it is a bit unfair.
At the same time the government should be using the money raised from treasury bills and PIBs, to build irrigation systems, roads and dams, etc.
BRR: Your operating expenses are on the higher end compared to other banks, is there a strategy in place for that?
SA: We are definitely on the high side, and I have a plausible explanation for it. We are in the growth phase, and are still opening branches. At the start of this year we had 321 branches, we are going to close this year at 386 branches. Now adding about 65 branches and hiring people to man them, will obviously mean higher costs.
Our sponsors would like us to grow to an optimum number and then take a pause. And we hope to achieve that within the next 2 years. Our next focus is the semi-urban space, where we believe the low cost resources are untapped.
BRR: What should be done to raise the savings rate of the country and what can banks do to facilitate this?
SA: I think banks have a social responsibility to create products that induce savings. And our shareholders' view is in alignment with mine. Our Founder Chairman, H.H. Sheikh Nahayan Mabarak Al Nahayan and our current Chairman, H.H. Sheikh Hamdan Bin Mubarak Al Nahayan are positively inclined to the social and economic well-being of Pakistanis.
We are coming up with saver focussed products and have already launched some products targeted towards pensioners.
Likewise, the society must respond as well. We as a nation, for the last so many years, have spent more than what we earned. The psyche must change.
BR: What is view on MCR?
SA: I think it's not the best way to measure a bank's sustainability. From the PBA platform we have made our opinions known to the regulator as well. If you look at the Basel III requirements, it mentions risk weighted capital adequacy ratio; times have changed and banks must now look at the risk-asset base. CAR will prove to be more effective, than just MCR.
BR: But since MCR is what's being applied today, what should the small banks do? Is BAFL looking to acquire one?
SA: They should either merge together to become profitable or inject capital.
Bank Alfalah at the moment is not looking to acquire any banks. However, if we do find a deal that adds value to our business and if offered at a good price, we may have a look at it, although traditionally it is organic growth that we subscribe to.
BR: How many banks do you think there should be in Pakistan?
SA: The number of banks in Pakistan is still below what the country's capacity is. Semi-urban cities have just a few branches. If more banks prop up competition will flow even to smaller cities and consumers will benefit.
BR: What is your view on mobile or branchless banking?
SA: We are already in that space; in the Watan Card scheme we were the only bank apart from UBL. The wallet is there now, and now we have to start introducing products for it. In the current quarter, we are launching full fledged branchless banking, with our sister concern, Warid Telecom.
The technology handshake between the two organizations will be a key challenge. Raseen is one of our group companies that is likely to provide the architecture to enable the bank and the telco to talk to each other, technologically speaking.
We are introducing products and services for various types of transactions, remittances, and possible access to accounts across the country. It will serve two purposes; one it will allow greater reach out to the economy and at the same time will also document the economy.
The potential for mobile banking is anywhere between 60 to 80 million new clients in Pakistan, looking at the basic telecom subscribers.
Profile: Sirajuddin Aziz
Sirajuddin Aziz has been the Chief Executive Officer of Bank Alfalah Limited, for over three years. Prior to this, the Banking and Finance MBA-degree holder had over 33 years of experience in the banking sector, both locally and internationally.
His foreign experiences include that in China, Hong Kong, U.K, Nigeria and the U.A.E, where he has often represented banks in their meetings with the officials of the Asian Development Bank. Aziz is also fond of public speaking and writing and has a book 'In Quest of Mirage' to his credit.