The UBL Story
The Privatisation Commission (PC) threw a party on Jan 29 to celebrate the privatisation of United Bank Limited (UBL) — and nobody came! Correction, out of the two foreign guests invited one did turn up but without the “invitation card” — in this case the Earnest Money. For the fiasco the PC has no one but itself to blame since it had loaded the dice against its own interests (and that of Pakistan) by eliminating the domestic aspirants and narrowing the field of intending bidders to only two foreign competitors, both of Arab origin. This muddied up the so-called transparency in the process, making it a game of real-time “monopoly” where the final moves will come much after Feb 14, 1996, the date of the postponed bidding. Without the threat of local competition, one of the two surviving entities had promptly laid down a condition that the Government of Pakistan (GoP) would keep a deposit of Rs 20 billion in UBL for several years. Faysal Islamic Bank’s request being considered unacceptable, Ms Saudi Basharahill was left as the only suitor. Very little is known about Ms Saudi Basharahill except that its name does not seem to set the financial world alight. Left alone in the bidding process, Ms Saudi Basharahill took advantage and made a brazen “show of force” by making the Bid without the requested Earnest Money. This was too much for even the PC to swallow — or correction, perhaps too much for the PC to try and attempt to make the people of Pakistan swallow and as such the Bid was “postponed”.
In 1992-93, UBL’s basic share price was provisionally estimated at Rs 65. Given that Muslim Commercial Bank’s (MCB) 26% had gone at Rs 56 a share and Allied Bank Limited (ABL) at Rs 60 a share (the then PM Mian Nawaz Sharif giving a special discount of Rs 10 to the ABL employees from the original Rs 70). Rs 65 per share is a modest figure for such an enormous bank as the UBL. It is true that UBL has a very large debt portfolio and pilferage by employees is estimated conservatively annually at Rs 840 million. Annual profits fell from Rs 275 million in 1993 to Rs 59 million in 1994. Mr Shahid Hasan Siddiqui a senior economist and an eminent banker, contends that contrary to general public perception the decline in profitability is not due to stuck-up advances but due to a steep rise in expenses in 1994 as compared to 1993. Expenses increased by Rs 173 million and miscellaneous expenses by Rs 171 million in 1994, a cumulative grand total of Rs 354 million. The commission earned during the same period by the Bank decreased from Rs 1861 million in 1993 by Rs 183 million to Rs 1678 million. Blame the atrocious management by those picked by the government to run the bank as they resorted to wasteful expenditure besides adding surplus staff, many of them political appointees. Blame also the good credit given to perennial bad debtors under sustained political pressure. In contrast the public sector National Bank of Pakistan (NBP) recorded a rise in net profit of 196% in 1993 while privatised MCB showed only 28%. Dr Siddiqui suggested the obvious, it does not matter whether the corporate entity is public or private, with better management (and without induction of capital) and freedom of action, provided credit was not advanced on political patronage, UBL could have shown better profits.
UBL possesses a fine network of profitable foreign branches, the number is much in excess to each of what the two aspirant foreign bidders have. Much more than that the real asset that UBL has are its credit lines and excellent “Correspondent” arrangements all over the world. Any banker would love to get his (or her) hands on this “golden network”. New banks hardly have credit lines of US $ 1.5 to 2.0 million, it will take them a decade or so to come upto UBL’s US $ 30 to 50 million. To give one example, Army Welfare Trust’s Askari Bank Limited is very highly rated, “Euromoney” and other money magazines have given it excellent reviews. However when Askari opened an LC of about US $ 50 million for supply of machinery on a commercial bank in the Peoples Republic of China, the recipient bank refused the LC because Askari, despite its performance and credibility, did not have the requisite credit lines. In effect, as compared to MCB and ABL in this respect, UBL makes for a very lucrative target of acquisition.
The criteria laid down by PC for foreign investors gives an overview of the mindset of the present regime in its privatisation binge. To quote almost verbatim the PC Consultant, “A strategic foreign investor brings in financial strength and technical expertise, at most it will only make a few changes in top management while at the lower level all the employees “on the front lines” would be locals,” unquote. This is the exact recipe applied by the East India Company (and its successor British Government) in ruling over the South Asian sub-continent for 200 years. Moreover given the fact that we restrict foreign banks to 4 to 5 branches, control of UBL will pass into the hands of foreigners who would get hold of assets of almost US $ 200 billion in about 1,400 branches. Despite a straight challenge, the PC has also not been able to name one public sector bank in any country of the world that has been taken over by a foreign strategic investor, why should Pakistanis become the “guinea pigs” for such an experiment? Basically Ms Saudi Basharahil were in the timber business till the early 80s, coming into prominence into real estate, their main business presently, with a purchase of majority interest in the “Green Palace Hotel” in Medina in 1985. Almost 100% of the better known (as a financial institution) Faysal Islamic Bank staff are Pakistanis. If except for cosmetic top management, the rest of the management are going to be Pakistanis, why should we hand over ownership to foreigners? Or as is rumoured, are they simply a front for some privileged local Pakistani?
Put good management in place in UBL, give them freedom of action and ensure that credit is not disbursed on political considerations. Political patronage for appointments and promotions must be shunned. Pakistani bankers are the finest in the world, our management expertise being recognized by foreign banks which have a fair population of Pakistanis in senior management positions. MCB and ABL were not in such good shape as they are now, in both cases it was only Pakistani management that cleared up the inefficiency, intolerance, nepotism and corruption of public sector management. No new funds were injected. In MCB, deposits have risen from Rs 27 billion to Rs 100 billion, ABL has not been too far behind. Both MCB and ABL went into private hands on different routes. In MCB’s case a group of investors banded together and put a qualified professional banker, Hussain Lawai, as the Chief Executive and gave him total freedom of action. Today MCB is a bank much envied in financial circles in Pakistan and abroad mainly because of the dynamic initiatives of Hussain Lawai. The ABL employees led by a core of enterprising senior managers managed an innovative employees buy-out. As the original leader of this “inner” group, Khalid Latif was often fond of saying, “they had bought a bank without any money.” The ABL core group may have fallen out among themselves, one of the original group, Shaukat Kazmi, has kept up the momentum of ABL’s success story as its President since 1994. Both MCB and ABL were much smaller than their sister nationalised banks viz. Habib Bank Limited (HBL), NBP and UBL, but are now considered far better professional financial institutions than those remaining in the public sector, giving excellent service to its clients and much better incentives to its employees.
Public sector and private sector are mostly separated by the quality of management. People like Hussain Lawai have shown that no new capital is required to make a financial institution potent, only better management and sustained motivation of its employees who must be made to believe that they can profit from harder work, not by stealing the family silver. Why talk only about privatised banks? In the public sector NBP has shown signs of waking up from its decades old indolent slumber with MB Abbasi as President, deposits rising above Rs 200 billion and profitability 24%. Abbasi is tailor-made for controversy, that is the “Karma” of every man with vision who has the courage to attempt change. A society mired in nepotism where merit is a disqualification can never accept the commercial approach of people like the NBP President easily. NBP has proven that the whole focus lies in better management, UBL can be turned around in the way NBP while remaining a public sector entity. A crop of above par managers of the cast of Hussain Lawai, Shaukat Kazmi, MB Abbasi, etc exist, why not put any one of them to make UBL a Pakistani success story?
When UBL is stable and financially sound, let us then privatise the Bank by either (1) gradual disinvestment of shares till control is given to a domestic strategic investor, (2) selling over 26% shares to a domestic group (maybe in majority association with foreign entities) like in MCB, (3) going the employees buyout route like the ABL while giving them the option to bring in a “white knight”, domestic or foreign, as minority associates or finally (4) just leave it in the public sector with better management while disinvesting only minority percentage of shares to the public. One thing never ceases to surprise analysts, recognizing this potential of UBL, what is the magic that drives us to hand over a tremendous asset to foreigners?
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