The political instability that the country has suffered throughout history and still has not only affected the general conditions of Pakistan but also the foreign investors and multinational countries. Though HSBC is a foreign bank and the reporting line is in Middle East and London but the political conditions in the country affects its activities to quite an extent as ultimately the State Bank of Pakistan supervises all the activities of all local and foreign banks. As a result of the political instability, the international investors hesitate keeping their money as they are afraid of frauds and the culture of Pakistan as it is popular for its bad and unorganized trends. (Zaidi, A., 2009. Issues In Pakistan Economy. 2nd ed. Karachi: Oxford University Press.)
Since the world economy is moving towards a recession, so Pakistan is no exception to the economic instability and uncertainty. The GDP growth in 2007 was the fastest in Asia i.e. 7 % and was lead by growth in consumption and investments. National savings rose only slightly, indicating the slow growth in bank deposits and is low by International standards. The causes of low savings have been the low per capita income, high dependency ratio, urbanization, lack of proper infrastructure in rural areas and inflation leading to rise in prices.
Inflation is high due to high food prices which offset the demand management policies and the government subsidy on oil prices. As a result of high inflation, poverty is high and the productive capacity is stressed.
In the year 2007 the services sector grew by 8% with high profit recorded and an overall contribution of over 50 % in the GDP. Monetary policy was tightened but inflation was still on the rise.
The expansionary fiscal policy led to central bank borrowing and concessional finance for exports and textiles. Monetary growth was accelerated due to surge in external receipts. Monetary tightening was necessary given the exceptional growth in the money supply aggregating 19.2 % percent growth that was much higher than target of 5.3 %. This growth in money supply was due to excessive government borrowings, sharp rise in NFA due to external financing of deficit through Euro Bonds, US aid and multilateral loans. The State Bank of Pakistan raised the discount rate by 50 points to 9.5 %, SBP also drained excess liquidity from inter bank market and maintained overnight rates close to discount rates. As a result the interest rates rose and this impacted the loan quality, stringent provisioning requirements, increased capital requirements, the NPL ratio to loans declined. Liquid market for short term government papers exist, but long term debt instruments need to be developed. (Zaidi, A., 2009. Issues In Pakistan Economy. 2nd ed. Karachi: Oxford University Press.)
Since the rise in prices, the general public has become conscious towards their spendings and is facing a decrease in their disposable income. They are saving less and as a result the growth in the bank deposits has slowed down. Due to the political, economical and law & order situation being very uncertain, there is lack of trust found in the people of Pakistan on the financial institutions. Another aspect that adds to it is that people are less educated and unaware of how system works so rumors create great panic that result in problems in financial sector, hence affects HSBC also. (Zaidi, A., 2009. Issues In Pakistan Economy. 2nd ed. Karachi: Oxford University Press.)
With the advancement in technology and the increase of its usage, it has created many opportunities to all kinds of industries. There are now automated teller machines that have replace the conventional tellers, the whole banking systems have been automated assuring transparency in the system as a result of which the trust of the consumer has been gained. The internet technology has provided new avenues to work as online banking system is a common phenomenon in the west and is gaining popularity in Pakistan too. Many mobile and telecom companies are collaborating with the bank to reach out to the customers even more efficiently and conveniently. This has raised the level of the competition thus raising the pressures to compete in unique ways to add value. (Zaidi, A., 2009. Issues In Pakistan Economy. 2nd ed. Karachi: Oxford University Press.)
Law & Order:
The instability of the legal system and lack of freedom of the judiciary has impaired the growth of the economy as investments have slowed down. The law and order situation has become from bad to worse. The potential foreign investors have backed out and those who have already invested face threats and insecurity. The recent past is filled with the bomb blasts and attacks on foreigners and since HSBC is a foreign bank, it too has been threatened and still faces fears. Recently the government of Pakistan has enforced a law pertaining micro-financing. This law suggests that all banks must have at least three of its branches in each rural sector. (Zaidi, A., 2009. Issues In Pakistan Economy. 2nd ed. Karachi: Oxford University Press.)
General Driving Force Influencing the Industry:
Size & Scope:
The overall size of the banking sector has reached Rs 5.0 trillion by end of the fiscal year 2007. Since HSBC has only recently entered the market, its current market share is approximately around a 2-3% of the total market.
The scope of the banking industry is currently limited to only a few segments that are being targeted, and that are the consumer market, the corporate segment and the small and medium enterprises. Many other segments, such as segments based on demographics, age, gender etc. exist and can be targeted upon thus increasing the scope of activities. Currently the banking sector provide facilities of deposit, with drawl, lockers, ATMââ‚¬â„¢s, issuance of pay orders, demand drafts, transfer funds between accounts, issuance of cheque books, credit card facilities, loans account, online services, currency exchanges.( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
There has been more than two-fold increase in the loan portfolio in the past three years, which is considered to be high. Even though this strong expansion is accompanied with diversification across sectors as banks have ventured into relatively new areas like mortgage financing, lease finance, project financing (traditional business areas of non-bank financial institutions), aggressive lending tendencies have implications for the asset quality of the banking sector.
While on-going mergers and acquisitions are aiding the process of consolidation of the banking sector, the resulting ownership structure is posing new challenges for the regulators and supervisors. Specifically, cross ownership ââ‚¬” where banks own non-bank financial subsidiaries and associated companies, industrial and brokerage companies own banks etc., has increased the complexities of the banking sector. Similarly, cross border ownership of the banking sector involve home-host regulatory and supervisory issues. Effective supervision in this environment requires a strong coordinated supervisory mechanism and strong interface with other supervisory/regulatory agencies.
Fortunately, none of the above issues poses a significant threat to the stability of banking sector in the current environment. The deceleration in credit growth and the growing emphasis on internal control and risk management systems will serve to enhance banking sector stability in the future. The on-going mergers & acquisitions and increased minimum capital requirements are expected to play a key role in improving the stability of banking sector. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
The money supply and the aggregate demand of the economy are great influences that affect the banking sector. With the increase in the aggregate demand in the previous years that took place as a result of the consumption driven economic policies of the government, the demand for money in the whole system increased. Therefore the money supply increased. This resulted into a high inflation rate and increase in the prices. As a counter result the interest rates decreased, thus allowing the investors to borrow at low interest rate. Thus borrowings increased and deposits decreased. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
Porterââ‚¬â„¢s Five Forces
Bargaining Power of Customers:
Bargaining power of customers is relatively high, as switching costs are low for customers to leave HSBC and gain banking services from other banks. Foreign banks like Royal Bank of Scotland, Barclays etc have entered the market and thus add to the local banks thus serving as the current competitors. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
Foreign banks are the direct competitors of HSBC that are striving for the same market share and customers. In addition, local banks have a long-term trust relationship with their customers, which still provide them an edge. The banks that are practicing Islamic banking in the Islamic State of Pakistan are the potential competitors. Since polarity in the country is increasing, the middle class segment is vanishing leaving only a hand full of the upper class and upper middle class segment to target. This segment too has now options of other multi nationals and can switch to them at any time. With a nicheââ‚¬â„¢ segment that is being targeted it is becoming tougher to fight for market share and customer retention. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
The local banks are fast to imitate and since the banking system is a very transparent one, imitation is easy, thus increasing the fight between the competitors. They are trying to capture the upper middle and the middle-middle class segment that are currently the customers of the multi national banks. With their relatively low interest rates charged to the customers and higher interest payback rates compare to HSBC, they are strong threats as they have extremely lowered the switching costs to the customers. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
Bargaining Power of Suppliers:
Since the company is a financial institution, its supply is the money supply, that is supplied by the State Bank of Pakistan. Therefore, being the sole provider and supplier, its bargaining power is extremely high. The State Bank of Pakistan often imposes various restrictions on banks. Therefore, none of the banks are independent in policy making and cannot launch any product without prior permission of the State Bank of Pakistan. The banking history is replete with the examples that either Government of Pakistan or the State Bank of Pakistan puts ban on the marketability of the most successful products. All banks are restrained to independence in making their policies provided that they are not against the law and Islamic values. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
There are not many substitutes available. Those that are, are the share in the stock market and the government schemes such as the National Saving Schemes. The NSS is on a decline as these saving instruments are to their maturity and the customers have lost interest in them. The government has not been able to come up with any innovative saving schemes to attract the general public, therefore reducing the threat to of the substitutes to the banking industry. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
The Customer Analysis:
The customers are segmented on the basis of traditional segmentation of the income levels. The high end of the segments, that is the upper middle and the upper elite class customers are not price sensitive and are willing to take high risks to earn high returns. They focus more on long term gains and are inclined towards making huge investments. They expect and demand superior customer services and consultancy required for their businesses and investments. One of their unfulfilled needs is the demand for customized and personalized business consultancies along with portfolio management consultancy and wealth management services.The lower end of the segment is more focused towards saving and small investments after careful analysis of the financial situation. They make short term plans and investments. The long term investments that they make are mostly the pension saving schemes or life insurances to safeguard their future income. They require good customer services but do not expect a first class treatment. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
Industry Life Cycle:
The Banking Sector in Pakistan has emerged in its present form after passing through various stages of development in the last fifty years. At the time of independence, the new country had no bank of its own and commercial banking facilities were almost minimal and very outdated. With the creation of the country, the Habib Group brought over its entire set up to Pakistan and banking operation started. The State Bank of Pakistan was established through an Act on July 1, 1948 which marked the beginning of banking sector in Pakistan. In 1974, all the local banks in Pakistan were nationalized.
Nowadays, the world is going through a financial crunch due to the economic recession in US Economy, therefore the prevailing boom in the banking industry has been affected too. In the local market though there are many unfulfilled gaps in the banking sector, with the current products and services that are being offered, the banking sector is saturated, with a number of foreign banks and many local one too.
The banking sector is thus at its maturity stage, with instability and financial crunch effecting its processes at present. .( Hussain, I., 2009 Banking Sector in Pakistan. Dawn. 29 April, p.7)
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