final thesis
TRANSCRIPT
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Introduction
Financial sector plays a significant role in the economic development. A
very close relationship exists between financial sector growth and
economic growth.1 An efficient financial system is necessary for optimal
use of financial resources of the country. Economic development can be
achieved by using existing resources more abundantly without any change
in the production process or by combining already employed resources in
a better way.2
Commercial banks are in the business of providing banking services to
individuals, small businesses and large organizations. While the banking
sector has been consolidating, it is worth noting that far more people are
employed in the commercial banking sector than any other part of the
financial service industry. Jobs in banking can be exciting and offer
excellent opportunities to learn about business interact with people and
build up a clientele where you can find a way progress for your career.
Today's commercial banks are more diverse than ever before. We can find
tremendous and wide range of opportunities in commercial banking,
starting at the branch level where you might start out as a teller to a wide
variety of other services such as leasing, credit card banking, international
finance and trade credit and agro loan talking about Zarai Taraqiati Bank
of Pakistan. The banking sector in Pakistan has been going through a
1 Khalid Gil, Senior Vice President, Express News, Islamabad , January 16, 2010, p.052 Interview with, Saeed Anjum, Director Manager, Kissan Support Service Ltd, Islamabad, April 03, 2010
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comprehensive but complex and painful process of restructuring since
1997.3
It is aimed at making these institutions financially sound and forgoing
their links firmly with the real sector for promotion of savings, investment
and growth. Although a complete turnaround in banking sector
performance is not expected till the completion of reforms, but the signs of
improvement are quite visible now in the form of huge opportunity to
catch up with efficient utilization of available resources in our country.
The almost coincident nature of various factors makes it difficult to
straighten out signs of improvement and wear and tear.
Strong competition has forced the banks to adopt new technologies to
redesign business processes, improve products and services, and support
other organizational changes necessary for better performance. That is
why the owner’s of Zarai Taraqiati Bank Limited of Pakistan has adopted
the most important functions of commercial banking like building
deposits, maintaining different kind of accounts, billing system and many
more.
This study has been conducted to high light those specific areas and
factors which are going to be the most noteworthy adopting the modern
world commercial banking factors are like strategic leadership,
competitive intelligence, management of technology, and specific
characteristics of the company's change process propose their respective
3 Ibid
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importance for successfully implementing business innovation in Zarai
Taraqiati Bank Limited.
While these factors may indeed be important to enhance company
competitiveness, performance in competitive environment, adaptation of
modern banking system, maximize the utilization of company assets in
efficient and competent manner. Moreover, the measurement of
performance while considering these above factors to be the most vital
would be a difficult thing. To make it possible and measureable change in
pattern will be evaluated.
However, many are some other factors which may affect the performance
of Zarai Taraqiati Bank Limited yet they have not been considered on the
assumption that measuring of those factors would not be very useful in
study analysis. Because this study is of quantitative type as some annual
financial report has been underlined.
Objective of Study:
This study is an attempt to analyze the “Impact of Commercial Banking on
the Performance of Zarai Taraqiati Bank”
The main objective of the study is as follow
Role of commercial banking in the development of Pakistan
Evaluation of performance of Zarai Taraqiati Bank
Function of commercial bank as a performance indicator
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Methodology:
The methodology adopted for this purpose includes the collection of
secondary data from annual financial reports and statements of Zarai
Taraqiati Bank.
Secondly various studies and researches conducted by financial
institutions for this purpose, personal interviews with experience workers
of Zara Taraqiati Bank are also conducted to acquire useful information
for this study.
This study design will be more likely longitudinal which measures the
pattern of change in relation to time. The main reason of using this study
design is that it allows the researcher to measure the pattern of change and
obtain factual information, requiring collection on a regular or continues
basis, thus enhancing its accuracy.4
Hypothesis:
The study is based on following hypothesis, the acceptance or rejection on
the basis of following different variables like asset growth, increase in
liabilities, shareholder’s equity and profitability trends to measure the
performance.
Null Hypothesis:
This hypothesis will prove that Zarai Taraqiati Bank has improved its
performance since the commercial banking being started. It has improved
operations, profitability and financial leverage.
4 Ranjit Kumar, (2008), Study Design, Research Methodology, (2nded.), Pearson Education Australia, New Dehli, India, p. 97
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Alternative Hypothesis:
Hypothesis two will prove that Zarai Taraqiati Bank has not improved its
performance, operations, profitability and financial leverage along with
the functional changes being done by State Bank of Pakistan.
Chapter Review:
First of all this chapter discuss the importance of different factors like
commercial banking, economic condition for the purpose of simplicity
about the problem statement. Secondly the objective of study is explained
to further clear the topic. Thirdly the research methodology is explained
and finally hypothesis is built to further more prove the research topic.
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LITERATURE REVIEW
Banking is one of the most sensitive businesses all over the world. Banks
play very important role in the economy of a country and Pakistan is no
exemption. Banks are guardian to the assets of the general masses. The
banking sector plays a significant role in a modern world of money and
economy.5
Pakistan has a 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.6
It influences and facilitates many different but integrated economic
activities like resources mobilization, poverty elimination, production and
distribution of public finance. It is purchase of car or building of home
banks is always there to serve you better. It is an industrial project or
agricultural development of the country the sponsor-ship of banks is very
much involved. Banks play very positive and important role in the overall
economic development of the country7
5 Annual Report Asian Development Bank, Mahmood ul Hassan Khan, "Media Monitor Networks” Banking Industry of Pakistan, Vol.724, July 24, 2004, p. 046 Ibid, p.057 Ibid, p.05
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According to statistics of quarter ended June 2009, share of agriculture in
net advances stood at 4.7 Percent, thus it is amounting 150.5 billion in
contrast to 4.9 percent in the previous quarter. Zarai Taraqiati Bank is a
specialized bank that had Rs.75.92 billions advances and has 158 branches
across the country. A Very small number of people living in the rural
areas have bank accounts.8 Financial inclusion in the country is
reflection of the regulation’s strategic inclination towards including rural
non- banking. Recent measures introduced by the central bank to expect
financial inclusion range from tax holidays and flexible regulations to
micro financing. This is where commercial banking comes in the form of
Zarai Taraqiati Bank Limited. 9
In the banking sector, according to an analysis, average deposit rate
of6.3% in September 2009 has decreased by 150 bps, from 7.8 percent
during the corresponding month of the last year. Slow down economic
growth, double digit inflation during 15 months and prevailing uncertainty
in law and order situation and war on terrorism. These are the additional
factors contributing towards slow growth of deposits. It is pertinent to
observe that banks have remained oblivious to increasing deposit rates.
These deposits repeated assertion made by the previous government of the
SBP.10
8 Tariq Ahmed Saeedi, Financial Inclusion of Rural Economy , Pakistan # Gulf Economist, , October 26- November 1,2009, p. 20 9 Ibid10 Fozia Arooj, Review of Banking Sector, Pakistan # Gulf Economist, December 21-27, 2009, p. 7
18
During the last one decade, Pakistani banking system has gradually
evolved from a weak state owned system to a slightly healthier and active
private sector driven control. The private sector controls nearly 80 percent
of the system assets, as opposed to the early 1990s when 90 percent of the
system assets were controlled by the government. According to one
estimate, banking system in Pakistan is made up of 53 banks, which
includes 30 commercial banks, four specialized banks, six Islamic banks,
seven developments financial institutions.11
The four largest commercial banks account for 44.2 percent of system
assets, while eight second-tier banks accounts for a further 35 percent
indicating moderate concentration. The country’s commercial banking
sector has the potential to grow further and its expansion is crucial for
national economy. So development banks like ZTBL which is a
development banks initially, going to be a commercial bank for multiple
of good reasons.12
A survey conducted to find out the reasons of lower usage of bank loans
by rural population found that from people side interest based financing
was a hurdle in utilization of financial assistances. People are reluctant to
take loans because of the margins charged (Interest) on them, are violation
of Islamic injunctions or against Shariah. Therefore, Shariah- complaints
financing can be a booster to financial inclusion. Majority of the farmers
11 Syed Fazl-e-Haider, Evolution of Pakistan Banking Sector, Pakistan # Gulf Economist, December 21-27, 2009, p.2012 Ibid
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take loans from informal sources like friends, family, input suppliers and
arties. This is how the ZTBL in fundamental approach for every farmer to
go and get loans.13
For reforming the banking and financial system in response to financial
crisis of 1996, implementation of the Government’s banking and financial
sector strategy started in earnest 1997 and is well advanced. There is a
broad agreement between the government and the Bank on the vision for
Pakistan’s financial system - a market oriented, predominantly privately
owned banking and financial system and a financial system that operates
under strong regulatory framework, is supported by an effective legal and
judicial service, consequently, the Bank Group and Asian Development.
Bank has been actively supporting the implementation of the strategy with
adjustment lending, restructuring and privatization operations, technical
assistance to strengthen the financial infrastructure, including the payment
system, credit information and anti money laundering, and expanding the
micro finance sector. Priorities include adhering to the privatization
schedule for the Non Commercial Banks, closing most of the (DFI)
Development Financial Institutions, improving the legal and judicial
system for financial contract dispute resolution, and achieving full market
integration by phasing out special credit programs and closing tax and
regulatory arbitrage opportunities.14
13 Tariq Ahmed Saeedi, Financial Inclusion of Rural Economy, Pakistan & Gulf Economist, November 1, 2009, p. 2014 Annual Report Asian Development Bank, Khalid Mahmood, ”Pakistan Country Assistance Strategy”, Vol.755, July 6, 2007 Annex II, p. 23 of 23
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Profitability of commercial banks in Pakistan is on downward trend
according to results of last calendar year, decreasing 25 percent to a little
over Rs 50 billion as compared to Rs 66 billion in 2007. Remember,
decrease in profits does not imply loss. Actually they earned profit s
because of continuous product diversification and innovation, high spread
between rates of mobilizing capital and credits (deposit and lending) and
substantial earning on government securities such as treasury bills.15
Performing more than ordinal dual functions of deposit mobilization and
advances extension, the bank in developed nations have broadened their
description of functions, maintaining portfolios as investment bank,
buying debts of countries, managing complicated and sophisticated system
of various derivatives in commodities. In Pakistan, though, debt buying
has appeared as profitable option as seen in recent thorny issue of circular
debt.16
The overall profitability of commercial banks (24 banks as financial s of
Bank of Punjab are not available) for the year 2008 shows a decline of
24%. This was mainly due to provisioning against non- performing loans
and advances, impartment cost. Another key reason affecting profitability
of banks is steep rise in administrative expenses. Many analyst s fail to
understand this phenomenon because now most of the services are
provided at very high cost, worst being deduction s for not maintaining
15 Annual Report Asian Development Bank, Khalid Mahmood, ”Pakistan Country Assistance Strategy”, Vol.755, July 6, 2007 Annex II, p. 23 of 2316 Tariq Ahmed Saeedi, Bright Growth Prospects For Banking Industry, “Pakistan & Gulf Economist”, April 20-26, 2009, p. 07
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minimum balance. It is interesting to note that while most of the banks
have fixed a minimum balance requirement. This condition must be
abolished at the earliest to encourage small savers to keep their money in
the banks.17
Pakistan’s banking system has effectively coped with several challenges
emanated from economic slowdown worldwide, mainly because of strong
resilience built over the years and effective regulatory and supervisory
regime. According to the State Bank of Pakistan’s quarterly performance
Review of the Banking System for the quarter ended December 31m
20008 released recently , growth rates, credit risks, and earning of the
banking system are likely to remain under strain in future due to
constrained economics environment both at home and global fronts. Low
demand for bank’s advances will shift asset mix away from advances to
government papers, and deposits are likely to grow at steady pace.18
Banking sector of Pakistan has been transferred over a short period of
around eight years from a sluggish and government oriented sector,
largely bureaucratic culture, into a much more competitive and profitable
industry. In recent years, the healthy performance of financial sector and
in large part banking sector has been crucial for economic growth.19
17 Shabbir H.Kazmi, Declining Bank’s Profitability, “Pakistan & Gulf Economist”, April 20-26, 2009, p.0718 Kanwal Saleem, , Banks and DFIS Growing, “Pakistan & Gulf Economist” , April 20-26, 2009, p. 1719 Sumaira Fazal, Banking sector of Pakistan- A key Growth Driver of The Economy, “Pakistan & Gulf Economist”, September 15-21, 2008, p.09
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The overall banking industry of Pakistan has undergone a huge leveraged
volume expansion. The banks have increased their geographical outreach,
via opening up of new branches by many folds. In fact, the increasingly
competitive environment has led to the massive expansion. This has, in
turn, resulted as; customer service, improved geographical coverage and
product innovation. All major reforms in the banking sector have resulted
in a more resilient and efficient banking system, which is better placed to
absorb significant macroeconomic shocks. 20
While there are so many positive factors, the banking industry also
remains prone to various challenges steaming form operating
environment. The State Bank of Pakistan, in persistence of its tight
monetary policy, made changes in discount rate, Cash Reserve
Requirement. The central bank tried to slash bank’s lending ability that
has been a cause of heavy financing to the government particularly and
also exerting some pressure on the interest rate spreads, thus reducing
overall top line growth of the banking industry.21
Pakistan is a country with very high population growth rate of 2.14%
yearly, considering this huge population growth rate, there is big market
potential for consumer banking related services. The banking industry is
no exception to this, until and unless the common man in not being
provided with banking facility at an individual level, the growth of
20 Sumaira Fazal, Banking sector of Pakistan- A key Growth Driver of The Economy, “Pakistan & Gulf Economist”, September 15-21, 2008, p.1021 Ibid
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banking industry cannot be sustained. There is a need to bring a greater
percentage of Pakistani population into the banking system and until and
unless banks do not reach out for the masses it will not be possible 22
As far as impact of State Bank of Pakistan’s monitory policy on banks is
concerned, the increase in Cash Reserve Requirement would reduce
liquidity for banks and would consequently impact deployment of funds.
The year 2008 has proved to be the toughest year for the banking industry,
mainly because of the above discussed strict measures taken by the
regulator, that have dented the banking sector earning, though it still
remained at a very comfortable level. The initial set back to the industry
was the plunge in the net earnings of around 16% during the first quarter
of 2008 owing to the incremental provisioning banks had to make on the
back of removal of Forced Sale Value benefit by the State Bank of
Pakistan.23
As for as growth in Pakistani banking industry is concern, banking
industry of Pakistan bleak or can banks operating in Pakistan cower while
taking expansionary plans across the country what their counterpart in
developed economies did because of financial downturn or because they
reach to a penetration point downturn proved just an excuse of rolling
back further expansion locally and internationally. Considering a
22 Amanullah Bashar, Consumer Finance Plays Vital Role in Economic Growth, Pakistan & Gulf Economist, June 1-7, 2009, p. 0623 Ibid
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diminutive operational base of banks in Pakistan, it would not master
expert analysis to answer no.24
Even after taking into consideration all that is known as financial sector
including insurance, stock market, non banking financial institutions, etc.
This base has huge space to expand to engulf a large number of bankable
Pakistani population. Therefore, when governor State Bank of Pakistan
Syed Salim Raza said, “With confidence banking industry of Pakistan has
immense to be explored, he was quite right as only about 8.6 million
people are presently using banking services nationwide. But his utterance
that interests of foreign investors in banking industry have not been
dimmed in spite of macroeconomic imbalances raises some doubts.”25
The outcry for loans write off appeared in public with a force and went
hoarse before becoming purposeful in taking to the task, those who did not
deserve to get their loans written off. Many a time, such undeserved favors
have been coming into limelight, but no avail and reports bluntly
highlighting the names and magnitude of loans written off turned out to be
a vehicle of point scoring or political gains making one or two responsible
for assisting such acts of robbers.26
There were reports which indicated that a total of Rs. 60 billion was
written off during the last government. They named several individuals
24 Tariq Ahmed Saeedi, Bright Growth Prospects for Banking Industry, Pakistan & Gulf Economist, April 20-26, 2009, p. 1425 Ibid26? Tariq Ahmed, Loan Write-Offs Go Unnoticed, Pakistan & Gulf Economist, December 21-27, 2009, p. 21
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from politics, non service military personnel to business community, who
got their loans written off by different financial institutions, no one was
explaining why these people were needed to write off their loans.
Reportedly, National Bank of Pakistan had the large chunk of loans
written off followed by Zarai Taraqiati Bank of Pakistan27
There are genuine cases of non-performing loans for example when
borrower loses its ability to repay or has no other means of repayment.
But, there were habitual defaulters who are used to borrow huge amounts
from the financial institutions against pledges worth below than the
principal amount of loan, Subsequently, non-performing loans leaves
financial institutions with overvalued liquid assets of defaulters, which
hardly compensate a small part of the infected assets.28
Over the last decade or so, Pakistan has experienced an exponential
growth of consumer banking and in the rest of the banking industry. This
extraordinary development has followed privatization of nationalized
banks, banking reform brought about by the State Bank of Pakistan and an
increasingly marketing oriented approach which has primarily targeted a
large urban consumer base.29
The increasing competition and rivalry among competitors along with
consistently increasing customer requirement have led to enhance
27 Ibid, p. 2128 Ibid, p. 2229? Atif Hassan, Handling Mass Records in Consumer banking, Pakistan & Gulf Economist, June 1-7, 2009, p. 09
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awareness amongst banks on the prospective and significant information
technology in banking. The arrival of foreign and private banks with their
superior state of the art technology based services has pushed Pakistani
banking infrastructure. A combination of regulatory and market force has
supported the implementation of technology and automation in the
Pakistani banking industry.30
Banks and financial institutions have recognized information technology
as an enabler of sophisticated product development, better market
infrastructure, and implementation of reliable techniques for the control of
risks. This helps the financial analyst’s to reach geographical distance and
diversified markets. With continues and rapid advances in technology, the
banking sector has seen a revolutionary wave.
The overall profitability of commercial banks shows a decline of about
24%. This was mainly due to provisioning against non-performing loans
and advances, impairment cost, and increasing administrative expense.
Provisioning against non-performing loans amounted to Rs. 62 billion for
2008 as compared to Rs. 50 billion in previous financial year 2007. As the
private sector demand is on the decline and government’s borrowing is on
the rise, commercial banks found investing in Treasury Bills high yielding
as well as more secure.
Banks and other financial institutions are the heart (centre) of any
economy, and they help the different sectors of the economy to move
30 Ibid
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along with high degree of attraction to the centre, so that the economy
remains strong and resilient to the external factors. The above review of
banking sector, financial inclusion, and evolution of banking sector, rise
and fall in growth as well as in profitability, is vital in understanding the
importance and need of changes in overall banking sector’s infrastructure.
Chapter Review:
This chapter is the appreciation of previous efforts had been made by
various researchers and economist about the economic condition of
financial sector in Pakistan. This study also includes the fabulous
parameters with measures the performance of banking industry and it had
been progressing during the critical and key point of time in past few
years.
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Company Profile and History
Zarai Taraqiati Bank of Pakistan is the largest agriculture bank in the
country. It has many branches in all over the country. The bank has multi
services and investment plans for the development of agriculture in
country. Their corporate vision is to serve the needs of the farming
community, by delivering financial products and technical services on a
competitive and sustainable basis, in a convenient, efficient and
professional manner, leading to success of the Bank and the farmers.
Their corporate mission is to play effective role in the promotion of
economic growth, by enhancing the availability of credit to the agriculture
sector, through reliable access to sustainable financing, special lending
programs, technical assistance, products & services, and to promote career
development opportunities for increasing professionalism and technical
proficiencies of employees.
Zarai Taraqiati Bank is a specialized bank providing agricultural credit
facilities to the farmers and agro related businesses in Pakistan. The bank
enjoys supreme ruler guarantee of the Federal Government Pakistan that is
State Bank of Pakistan and ensures safety of deposits under the Banks’
(Nationalization) Act 1974. Bank is largely funded through State Bank of
Pakistan’s credit lines while contribution from deposits remains nominal.
ZTBL is actively exploring different options and opportunities for
resource mobilization including bilateral/multilateral arrangements with
financial institutions. In case these efforts materialize; it would diversify
18
the existing funding source of the bank, thereby reducing reliance on the
State Bank of Pakistan. The Government of Pakistan has a rate of 8% on
loans right now which was about 14% previously. Consequently, it has
markup recovered which means bank is making profits.31
Moreover, the bank’s failure to service its debt on account of financial
constraints had prompted it to put forward a debt restructuring plan to
State Bank of Pakistan for settlement of the entire loan. State Bank of
Pakistan agreed to the proposal except for the capping of markup rates at
2.4% and proposed another restructuring plan according to which the
entire debt and markup differential will be settled without putting any
burden of cash outlay on Government of Pakistan. The proposed plan
would increase investments of the Government in Zarai Taraqiati Bank
Limited by Rs. 33.9 billion in the ratio of 50% as equity and 50% as
interest free loan.32
The plan is expected to be finalized soon. Of the remaining proceeds from
Asian Development Bank’s loan for project financing, Zarai Taraqiati
Bank Limited has made the first move for the restructuring process of its
information technology infrastructure in line with a comprehensive five
year strategy. Initially, integration of branches with zonal offices and head
office is on the go, while a variety of software applications have been
31 Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL, “JCR_VIS Credit Rating Company limited”, June 30, 2009, p.0232 Ibid, p.02
18
developed to enhance loan disbursement and monitoring in order to make
it error free system.33
The bank has also improved upon its data storage and backup facilities.
While Zarai Taraqiati Bank Limited charged off Rs. 3.3 billion (FY08: Rs.
3.6b), there was a significant decrease in provisioning during the year at
Rs. 1.9b (FY08: Rs. 3.1b) on account of declining fresh Net Profit Losses.
Consequently, asset quality indicators have depicted an improvement with
net infection decreasing to 7.4% (FY07: 12.2%) while net NPLs as a
proportion of net equity was also lower at 30.7% (FY07: 52.5%). As a
consequence of raise in salaries, administrative expense witnessed an
increase to Rs. 4.5b (FY07: Rs. 3.8b). The bank’s overhead and efficiency
ratios are relatively higher at 4.6% (FY07: 4.2%) and 43.4% (FY07:
41.3%), respectively. Amidst fixed pricing regime, spreads improved to
3.5% (FY07: 2.8%) on account of better return on placements with
financial institutions. Furthermore, there was substantial support to
profitability in Financial Year 2008 from recoveries while fresh
provisioning was also lower as compared to the preceding year.
Resultantly, net profit increased to Rs. 2.6 billon in 2008 (FY07: Rs. 1b).34
Zarai Taraqiati Bank Limited (ZTBL), formerly, Agricultural
Development Bank of Pakistan (ADBP), was formed through the repeal of
Asian Development Bank Ordinance 1961. ADBP was established
33 Ibid, p.0334 Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL, “JCR_VIS Credit Rating Company limited”, June 30, 2009, p.04
18
following the merger of Agricultural Development Finance Corporation
and Agricultural Bank of Pakistan. Zarai Taraqiati Bank Limited took over
all assets, business, contracts and liabilities of ADBP and started its
countrywide operations as a public limited banking company on
December 14, 2002. The bank has the express authorization to provide
finance and credit facilities to small farmers’ agro related businesses and
low-income households which ultimately leads to economic growth of the
country.35
Originally, the Agricultural Development Bank of Pakistan (ADBP) was
established under the ADB Ordinance, 1961 as it has been discussed quite
few times in this study. Subsequently Agriculture Development Bank of
Pakistan was reorganized into a public limited company, with the purpose
of ensuring better governance and the provision of high quality financial
services to its rural clientele. Accordingly, Zarai Taraqiati Bank Limited
(ZTBL) took over all assets, business, contracts and liabilities of ADBP
and started its countrywide operations as a public limited banking
company on December 14, 2002.
The bank’s objective is to provide agricultural credit to farmers located in
rural areas and to low income households of the country. At present,
ZTBL operates with 342 branches divided into 25 zonal offices with the
principal office situated in Islamabad. The conversion of Agriculture
Development Bank of Pakistan into Zarai Taraqiati Bank limited had a
35 Ibid, p.05
18
conditionality of the Asian Development Bank (ADB) loan framework as
per which a restructuring exercise was started. The restructuring process
entailed ADB’s Rural Finance Sector Development Program (RFSDP)
with the objective to transform ZTBL into a sustainable Rural Finance
Institution.36
It also included the up gradation of Information technology (IT)
infrastructure for which funds from ADB’s loan were to be utilized. As
part of the overall organizational restoring strategy, the bank has taken
several initiatives to enhance its lending activities while adopting a
prudent approach with regards to credit quality. Kisaan Support Services
(Pvt.) Limited (KSSL), a subsidiary of Zarai Taraqiati Bank limited, has
been engaged to sell fertilizer to farmers at subsidized rates, while a
Memorandum of Understanding (MoU) is signed between Kisaan Support
Services (Pvt.) Limited and Pak Arab Fertilizer to ensure timely
availability of agricultural inputs. During 2008, ZTBL signed another
MoU with the Department of Agriculture, Azad Jammu and Kashmir
(AJ&K) under the title of ‘Green Tractor Scheme’.37
The scheme was introduced to promote mechanized farming in AJ&K by
providing tractors to the farmers. Zarai Taraqiati Bank Limited will
process loan applications recommended by the Department of Agriculture,
AJ&K for purchase of tractors as per prices fixed by the bank. The loan
36 Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL, “JCR_VIS Credit Rating Company limited”, June 30, 2009, p.0737 Ibid, p.07
18
will be recoverable in 5 years equal semi-annual installments commencing
after six months of disbursement. Farmers will make full payment of each
installment to the bank and claim reimbursement by showing the bank’s
receipt to the Department of Agriculture, AJ&K. One farmer will be
eligible to avail the facility of one tractor at a time and may apply for a
second loan after clearing the previous one in full.38
Similarly, Government of Punjab has decided to launch ‘Green Tractor
Scheme 2008-09’ for the farmers of Punjab Province. The provincial
government allocated funds of Rs. 2 billion for provision of subsidy @ Rs.
200,000/- per unit for 10,000 tractors. Farmers are selected through a
balloting process and may purchase tractors on cash or credit from any
bank. ZTBL is collaborating with the government of Punjab for successful
implementation of the scheme by catering for credit needs of eligible
farmers. Furthermore, Government of Pakistan (GoP) provides funds in
order to look after the production credit needs of registered farmers under
‘Crop Maximization Project’. Disbursements under the said scheme began
in June 2003 and Rs. 655.4 million has been disbursed for the purpose
since inception, with a recovery ratio of 98% as at December 31, 2008.
During FY08, disbursements amounted to Rs. 160.1million and the
recovery ratio stood at 94%. 39
38 Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL, “JCR_VIS Credit Rating Company limited”, June 30, 2009, p.0839 Ibid, p.08
18
The bank has also arranged an insurance cover for five major crops, dairy,
livestock and tractors from M/s Adamjee Insurance Company Limited.
The insurance will be mandatory for all new borrowers availing loan from
ZTBL. To facilitate the borrowers in calamity hit areas, the insurance
company will conduct a survey of the affected areas much before the
official declaration by the government so that the borrowers may be
compensated on timely basis. Annual premium will be charged @ 1.9% of
the disbursed loan. On renewal, the principal outstanding will become the
sum insured.40
40 Ibid, p.09
18
Performance Analysis and Review
In this study the performance analysis will be done by calculating different
financial ratios which is a quantitative measure. Some qualitative
measures will also be considered to evaluate the performance of Zarai
Taraqiati Bank.
Zarai Taraqiati Bank is needed to make big Changes in Information
Technology Infrastructure, therefore, in the process of streamlining the
Information Technology & Management Information System (MIS) under
the project loan sanctioned by Asian Development Bank. For that purpose,
a comprehensive five year strategy has been adopted to acquire,
implement and train the relevant Human Resource Management. Medium
to long term goals are established, meanwhile objectives are set which is
properly approved by the Board of Director. As a preliminary step, all
zonal offices (including the head office) have been upgraded to use
communication network protocol for efficient emails and circular
management system. This advancement has been done to facilitate the
employee’s work efficiency.41
As per State Bank of Pakistan’s directions, data cleansing exercise has
been started while a number of Business Process Reengineering (BPR)
like pilot projects were introduced to ensure efficiency in loan processing
and monitoring with help of Kisaan Support Service Limited. This is the
41 Aamir Shafique, Annual Financial Report 2009, VISC Credit Rating Company Limited, June 30, 2009, p.02
18
best ever project initiated by the managing director of Kisaan Support
Services (Pvt.) Limited. Of the various projects executed, some notable
ones include restoring of Loan Processing System (LPS), Deposit
Management System (DMS), SAM Data Cleansing System, Internal
Credit Risk Management System and Internal Audit Facilitation System
(IAFS). Previously, all branches were using a manual system for handling
of deposits, except for the head office where a Common Business Oriented
Language (COBOL) system was implemented.42
Deposit Management System is an integrated retail banking solution
software program having the power to generate comprehensive reports and
queries for internal and external purposes of the accounts. The system
allows real time updating of the database and has enhanced security
features with installing the backup power programs. Initially, 250
branches have been selected for implementation of Deposit Management
System. While deployment all selected branches of Punjab and Sindh has
been completed, implementation in Baluchistan and NWFP is in progress
now a days. The installation of Local Area Network (LAN) comprising
600 network nodes is complete and ready to use. In addition, Wide Area
Network has also been made available in all zonal offices along with 275
branches. Implementation of Wide Area Network in the remaining
branches is under progress.43
42 Aamir Shafique, Annual Financial Report 2009, VISC Credit Rating Company Limited, June 30, 2009, p.0243 Aamir Shafique, Annual Financial Report 2009, VISC Credit Rating Company Limited, June 30, 2009, p.03
18
For the discovery of Credit Rating Risk, according to annual Financial
report of year 2008 Gross Advances Portfolio increased to Rs. 77.8 billion
(FY07: Rs. 70.5b), which was growing by 10.4% every year so far the this
growth is in upward shift. During the year, loans of Rs. 70.7 billion
(FY07: Rs. 55.9b) were disbursed against a target of Rs. 65 billion in
Financial Year 2008. Total number of farmers served was 571,946 in
comparison to 475,756 last year, showing an increase of 20.2%. In
Financial Year 2009, the bank has targeted to reach 600,000 farmers
which were achieved in only 8 months.44
Primarily, disbursements have been made in production loans while
around 17% of the fresh portfolio is intact includes loan for development
purposes. Punjab remains the largest beneficiary with around 80%
disbursements, whereas Baluchistan comprises the lowest share of 0.2%
only. However, the bank intends to enhance its outreach in Baluchistan,
going forward. Over the years, the bank has been making material efforts
to recover over dues on loans.45
Of the total recoverable loans, recoveries to the tune of Rs. 65.9 billion
(FY07: Rs. 58.1b) were made with recovery ratio improving to 86%
(FY07: 80.9%) during Financial Year 2008 and in last year that ratio has
been increased to about 98%. Total provisions decreased to Rs. 7.9billion
which was previously Rs. 9.2 billion in 2007, largely on account of charge
44 Annual financial Report, (2008) Publish by Zarai Taraqiati Bank Limited, December 31, 2008, p. 1545 Ibid
18
off to the tune of Rs. 3.3 billion during Financial Year 2008, Total gross
Net Profit Losses declined to Rs 13b (FY07: Rs.16.7b) with gross
infection of 16.7% (FY07: 23.7%) on books Accounting for provisions, on
net infection decreased to 7.4% (FY07: 12.2%). Around 28% of Net
Profit Losses are off the record in the loss category. 46
The following table shows the regulatory classification of Net Profit
Losses category wise for last two financial years.
0 Categories Rs. Millions FY. 07 FY.08
1 Other Assets Especially Mentioned
5254 6039
2 Substandard 2916 1614
3 Doubtful 3820 3666
4 Total 11990 11319
This table shows the Net Profit Loss of assets for the two financial years
2007 to 2008. The trend in increase or decrease in the amount of assets
being held my Zarai Taraqiati Bank during this period can be seen by
drawing a graphical presentation.47
46 Annual Financial Report 2007, Published by Zarai Taraqiati Bank Limited, December 31,2007, p. 05-0747 Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited, December 31, 2008, p. 24-30
18
FY= Financial Year
This graph depicted that decreasing trend in net profit loss of assets in two
year, there were some incomplete values of these assets had been printed
in the annual financial statement of year 2009, however the trend of given
data was clearly indicating the downward shift in net profit losses, which
appears to be the progressing sign as for as the performance of Zarai
Taraqiati Bank is concerned.
For the purpose of measuring the performance while considering the
Liquidity Ratios48which is a class of financial metrics that is used to
determine a company's ability to pay off its short-terms debts
obligations. Generally, if you higher the value of the ratio, the larger the
margin of safety available that the company possesses to cover short-term
debts.49
48 Lawrence J. Gitman (2006), Liquidity Ratios, Principals of Managerial Finance, (11thed.), Pearson Education, United States of America, p. 4349 Lawrence J. Gitman (2006) Liquidity Ratios, Principals of Managerial Finance, (11thed.), Pearson Education, United States of America, p. 43
18
Of the total lending book, 7.8% of loans (on net basis) have been financed
through deposits amounting to Rs. 5.4 billion, against a target of Rs. 7
billion in Financial Year 2008. Deposit base largely comprises of current
assets while a nominal proportion remains in term deposits.50
Deposits Information Rs. In Billions
FY. 07 FY. 08
1 Fixed Deposits 0.29 0.11
2 Current & Saving Deposits
5.1 4.2
3 Others 0.05 0.03
4 Total Deposits 5.4 4.3
The following table depicts the deposit composition of the bank. To
further understand the change in deposits a graph can be drawn.
Over the years, the bank’s main source of funding has been debt from
State Bank of Pakistan (SBP). Zarai Taraqiati Bank Limited obtained
loans from State Bank of Pakistan for providing finance to customers for 50 Warren Reev Fess (2008), Accounting, 21th ed., p. 392
18
agriculture purposes. Of those, three credit lines amounting to Rs. 1.6
billion carry interest rate of 4% per annum while remaining thirty two
credit lines amounting to Rs. 49.7 billion are based on profit and loss
sharing subject to maximum share of profit to State Bank of Pakistan
ranging from 4% to 10% per annum. These loans are secured by way of
guarantee of Government of Pakistan. Furthermore, SBP’s equity holding
of Rs. 3.2 billion was converted into subordinated loan on terms to be
agreed with SBP. Total borrowing (including subordinated debt) from
SBP amounted to Rs. 54.5 billion in Financial Year 2008.51
Since 2003, ZTBL has not been able to pay installments to State Bank of
Pakistan on account of financial constraints. In the year 2003, the bank has
submitted a proposal to the State Bank of Pakistan regarding restructuring
of debt. According to the proposal, the debt will be repayable in 15 equal
semi-annual installments with a provision to make repayment of the
subordinated debt in the last installment. The markup will be pegged to
weighted average yield of 12 months Treasury bill rate of 2.4% per annum
as per Treasury bill auction dated June 12, 2003 and capped at the
aforesaid markup rate for an initial period of five years.52
Profitability Ratios, used to assess a business's ability to generate earnings
as compared to its expenses and other relevant costs incurred during a
specific period of time. For most of these ratios, having a higher value
51 Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited, December 31, 2008, p. 3052 President Zaka Ashraf addressing the Zarai Taraqiati Bank’s Employees, Annual conference, Minutes of Meetings 2008, June 30,2008, p.01-02
18
relative to a competitor's ratio or the same ratio from a previous period is
indicative that the company is doing well.53
ZTBL is a specialized bank facilitating the agriculture sector in Pakistan
by providing agricultural loans to farmers at subsidized rates. However, by
doing so, the financial viability of the bank gets compromised as ZTBL is
required to lend at a rate of 8% that is lower than the previous rates of
around 14% per annum. With an adequate growth in advances portfolio,
net markup income increased to Rs. 5 billion (FY07: Rs. 3.6b). Markup
income largely emanated from the advances portfolio comprising 75.8%
of the total.54
Resultantly, spreads increased by 70 basis points to 3.5% (FY07: 2.8%).
The bank’s focus on special assets has yielded positive impact on total
revenues as recoveries on SAM loans amounted to Rs. 4.8b (FY07:
Rs.5.1b) in FY08. With nominal contribution from dividend and fee
income, total revenues (net of interest expense & defined benefit plan)
stood at Rs. 10.4b (FY07: Rs. 9.2b). On account of declining fresh NPLs,
provisioning requirement was subsequently reduced during the year. An
additional provisioning of Rs. 1.9b was set aside in FY08 against Rs. 3.1b
last year, thereby reducing the profit by the same amount in FY08.55
53 Lawrence J. Gitman (2006) Liquidity Ratios, Principals of Managerial Finance, (11thed.), Pearson Education, United States of America, p. 5054 Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited, December 31, 2008, p. 3555 Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited, December 31, 2008, p. 35
18
Considering the size of the bank, its overheads have always remained on
the higher side. While head count (including permanent) decreased to
5,286 (FY07: 5,333) in FY08, there was a significant increase in
administrative expenses to Rs. 4.5b (FY07: Rs. 3.8b) largely on account of
raise in salaries. Overhead and efficiency ratios stood at 4.6% (FY07:
4.2%) and 43.4% (FY07: 41.3%), respectively. Net profit amounted to Rs.
2.6b (FY07: Rs. 1b). Improvement in profitability can largely be
attributed to reduction in provisioning as compared to the previous year.
Going forward, containing Net Profit Losses improving on overheads will
play a pivotal role in determining adequate profitability levels.56
The number of amounts and types of long term financing used by a firm is
called capitalization Types of financing include common stock, preferred
stock, retained earnings and long term debt. A firm with capitalization
including little or no long term debt is considered to be financed very
conservatively. This is also called as cap, capital structure total
capitalization 57
The total value of all outstanding shares of a publicly traded company is
called capitalization. This can be calculated by the price per share.
Capitalization is one of the basic measures of a publicly traded company.
56 Ibid57 Lawrence J. Gitman (2006) Capital Structure, Principals of Managerial Finance, (11thed.), Pearson Education, United States of America, p. 475
18
Generally speaking, a higher capitalization indicates a more valuable
company.58
To measure the performance of Zarai Taraqiati Bank by considering the
capitalization vital subject, this study analysis their financial statement.
The paid capital increased to Rs. 12.5billion (FY07: Rs. 11.9b) on account
of bonus share issue. Accounting for retained earnings, net worth of the
bank has increased to Rs. 17.4b (FY07: Rs. 15b). While the risk weighted
assets increased at the same pace as equity, Capital Adequacy Ratio
(CAR) remained around prior year level of 24.1% (FY07: 24.5%). Over
the years, the high proportion of NPLs has been a drag on ZTBL’s equity.
However, there was a significant improvement this year when NPLs as a
proportion of their equity decreased to 30.7% previously which was 52.5%
during the financial year 2007.59
This is an indicator of profitability which is determined by dividing net
income for the past 12 months by the total average assets. An indicator of
how profitable a company is relative to its total assets. 60
Return on Asset provides an idea of how efficient management is at using
its assets to generate earnings. It is calculated, as shown here, by dividing
a company's annual earnings by its total assets, with ROA displayed as a
percentage. Sometimes this is referred to as return on investment. The 58 David L.Scott (2003), A & Z Guide to Investment term for Today Investor, London, Houghton Miffin Company.59 Aamir Shafique & Maimoon Rasheed Annual Financial Report 2009, VISC Credit Rating Company Limited, June 30, 2009, p.0760 Lawrence J. Gitman (2006) Profitability Ratios, Principals of Managerial Finance, (11thed.), Pearson Education, United States of America, p. 50
18
assets of the company are comprised of debt and equity, since both of
these types of financing are used to fund the operations of the company.
The higher ROA number the better as it indicates that the company is
earning more money with less investment.
Return on Assets= Net Income/ Total Assets
Increase in value this year over the last year divided by value of assets last
year. This is also called as rate of increase in asset value.
Financial assets of Zarai Taraqiati Bank have shown the considerably high
growth over the last three financial years which are under discussion in
this study analysis. Data to prove this statement will be discussed in
following financial measure.61
The assets of the company are comprised of debt and equity, since both of
these types of financing are used to fund the operations of the company.
The higher Return on Asset numbers the better as it indicates that the
company is earning more money with less investment. A firm's total assets
minus its total liabilities are known as shareholder’s equity. Equivalently,
it is share capital plus retained earnings minus treasury shares.
Shareholders' equity represents the amount by which a company is
financed through common and preferred shares. This equity can be
calculated by using the following formulas.62
61 Annual Financial Statements (2009), Published by Zarai Taraqiati Bank Limited, December 31, 2009, p. 2562 Lawrence J. Gitman (2006) Shareholder’s Equity Ratio, Principals of Managerial Finance, (11thed.), Pearson Education, United States of America, p. 43
18
Shareholder’s Equity= Total Assets - Total Liabilities
0 Categories in Rs.
FY. 2007 FY. 2008 FY. 2009
1 Total Assets 93,402,476 97,474,863 102,400,750
2 Total Liabilities 78,434,805 81,475,204 83,375,200
3 Shareholder's Equity
14,967,671 15,999,659 19,025,550
The date for above table has been taken from last three financial year’s
annual reports for the purpose of measuring the shareholder’s equity over
the years.
Result of this table can be illustrated by graphical presentation of the data.
This shows the increasing trend in shareholder’s equity over the years.
Liability is an account payable which is writes off by arranging new loan.
You cannot just decrease an asset and increase a liability without affecting
equity since Assets = Liabilities + Equity. And since you want to find a
18
situation where liabilities increase and assets decrease, you will need to
decrease equity by the absolute value of both changes (i.e. -6 + 5 = 11).
So, if Assets decrease by 5 and Liabilities increase by 6, then equity needs
to decrease by 11 to keep the equation in equilibrium. Essentially this
means that the journal entry will require some type of expense that is only
partially paid.63
Zarai Taraqiati Bank limited is basically an agro financing bank which has
started performing many additional commercial banking functions, its
ability to perform many multiple banking function make it more vital for
Economic Development of Pakistan. Moreover, amongst all economic
sectors, the contribution of Agricultural sector towards the gross domestic
product (GDP) of Pakistan is pre-dominant. All most all banks are
providing agriculture loans but their lowest interest rate which is about 8%
makes it standout of all the financial institutions. Pakistan being a agro
based economy highly depend on the agriculture development, to bring in
this progress you need to have a strong agriculture banking sector. Zarai
Taraqiati Bank has been fulfilling this need from birth of our country.
Although a lot of effort is still required to improve its function.64
63 Lawrence J. Gitman (2006) Liquidity Ratios, Principals of Managerial Finance, (11thed.), Pearson Education, United States of America, p. 47564 Interview with, Chaudhary Bashir Ahmed, Zonal Chief, Jhang, May 7, 2010
18
Conclusion
Healthy and functioning rural finance markets are directly related to
achieving the two key national policy objectives of accelerating rural or
agriculture growth and reducing poverty nationwide. The understanding of
these objectives depends on the simultaneity of developments in rural
finance and non-financial markets to promote the creation of diverse
sources of rural finance to build sustainable financial institutions, and
arouse products and capital flows in the rural sector.
For this, rural finance must be seen as an integral part of reasonable
development within a framework of macroeconomic stability. The
enduring corporatize restructuring leaves the basis for fundamental
reforms for rural finance market development. The frequent financial
drain, pursuing the old rural finance model and the narrowing fiscal space
have also promoted a shift in Government strategy that now seeks viable
intermediaries for enhancing outreach.
For the majority, access to affordable rural finance services is also
important to enable them to compete in the post-World Trade
Organization scenario. Inability to compete because of high financial costs
could reduce income of the majority of farmers and rural clients,
particularly the small and subsistence clients. Due to lack of access to
affordable rural finance services will also prevent the clients from
18
switching to non-farm activities. All these effort are made to reform the
Zarai Taraqiati Bank as an affordable Rural Financial Institution for
progress of rural population and enhancing their trust on banking.
Zarai Taraqiati Bank Limited has made substantial progress in advancing
the Information Technology (IT) system available in every part of country.
They have installed modern communication network protocol for efficient
emails and circular management system. Previously, all branches were
using the manual handling of deposits which has been converted in proper
I.T based Deposit Management System to facilitate their customers. Most
importantly, this mandatory advancement in Information Technology
system would be helpful in making the transparent banking system.
Encouraging element in the progress of Zarai Taraqiati Bank Limited is
consistent decrease in Credit Risk over the years starting from 2007 till
now. There has been a significant decrease in provisions and net profit
loss starting from the financial year 2008. Zarai Taraqiati Bank had
targeted to serve 600,000 (clientele) during the financial year 2009, which
has been achieved with remarkable effort only in half year.
As the amount of deposits depicted the decreasing trend in financial year
2008 with respect to previous year but the things changed so dramatically
that Zarai Taraqiati Bank accomplished its deposit target with in the year.
This indicates the strong financial position of the bank, being able to
convert their assets into rapid cash. Role of State Bank of Pakistan is vital
18
in pulling off their goals for any Financial Institution as it is for Zarai
Taraqiat Bank of Pakistan. With adequate growth in advances portfolio
their markup income has increased.
Overall, the return on equity is increasing which means that company is
getting more profit by investing less. Moreover, the increase in assets also
predicts the growth and ultimately leads to higher performance as a
financial entity with handsome amount of profit over the years.
This study is a preliminary investigation about performance assessment of
commercial banking of Zarai Taraqiati Bank Limited in Pakistan through
annual financial report’s analysis, during the on-going process of
modification in functional changes in a view to increase the profitability of
assets and other services. The variables used as inputs and outputs give us
some insight about dynamics of commercial banking in Pakistan.
Although, these cannot be considered as universally accepted measures of
bank performance but their inclusion merits with theoretical strands and
existing literature on commercial banking. The study calls for the
improvement in working of Zarai Taraqiati Bank of Pakistan through
combined efforts of banking sector and the government to be at par with
the best world practice.
Recommendations
18
During this study analysis in most of the cases performance seems to be
improving on daily bases, however, they needed to improve more in
achieving the organizational goals by every means. This thorough study of
Zarai Taraqiati Bank recommended few suggestions, especially in contrast
to their management system.
First of all, the employees of Zarai Taraqiati Bank Limited needed to have
effective performance management training. Employee is the life blood of
the organization and also very important asset itself for the company. To
utilize other assets of the company more efficiently and resourcefully the
employee as asset should be recognized
Their Human Resource Management department has to take brave steps in
order to bring history making development in banking sector. They need a
highly motivated workface to cope with day to day changes and
advancement in every work field like in information technology,
developing a realistic and objective performance management program,
and be the first one to avail the opportunity on the ground of their
professional skills they possessed.
As it has been uttered again and again that employees are the most
valuable assets for any company, therefore Zarai Taraqiati Bank should
took substantial initiatives to stop the political interventions in job hiring.
This study recommended optimistic approach toward achieving the
18
organizational goals for the worthwhile progress and continues
improvement is also necessary in attaining the ultimate success.