The resurgence of Pakistan’s middle class: Moving up the social ladder

Published: December 26, 2011
With more than 8,000 branches of 41 scheduled banks all over the country, the banking sector has witnessed phenomenal growth in the past 10 years: assets of the banking system have been growing at an average of 14.8 per cent since 2001.

With more than 8,000 branches of 41 scheduled banks all over the country, the banking sector has witnessed phenomenal growth in the past 10 years: assets of the banking system have been growing at an average of 14.8 per cent since 2001.

KARACHI: Hasan Rizvi used public transport to get around the city, and didn’t have a house of his own 10 years ago, while he studied for a Bachelor of Commerce degree at a college affiliated with University of Karachi. Today, he owns two motorcycles, one car and a modest apartment in a middle-class neighbourhood that he rents out to supplement his monthly income.

Rizvi’s upward movement on the social ladder corresponds with the growth in Pakistan’s banking sector that he has been part of since 2004.

In 2000, the combined profit-before-tax of all Pakistani banks was Rs4.5 billion. It reached Rs80.7 billion in 2009 – almost 17-fold increase over nine years!

With more than 8,000 branches of 41 scheduled banks all over the country, the banking sector has witnessed phenomenal growth in the past 10 years: assets of the banking system have been growing at an average of 14.8 per cent since 2001.

The exceptional growth in the banking sector has created thousands of private-sector jobs. The public sector controlled almost 80 per cent of the banking industry in 1997. However, after privatisation of several banks, the figure reduced to 20 per cent in 2004.

Rizvi said that to buy his apartment he took out a loan from his bank in 2008 at a reduced interest rate. Generally, the mark-up on home loans for ordinary customers is around 20 per cent. But the interest rate Rizvi is paying on his home loan as a bank employee is just five per cent.

He said he now lets out the apartment for Rs14,000 a month. The monthly instalment he pays to his bank is Rs.13,000, which means that without paying a single rupee out of his pocket, Rizvi not only bought his own apartment, but also makes an additional Rs1,000 every month – thanks to the fringe benefits of his bank job.

Similarly, car financing is also cheap for bank employees. While ordinary customers pay a 16-18 per cent mark-up on car loans, a bank employee gets it at a nominal rate of about five per cent.

“Every banker out there drives his own car and lives in, or rents out, his own flat. Banks pay well. And they give you facilities no other employer can afford to give its employees,” Rizvi said.

High profits for commercial banks over the past decade have resulted in the expansion of the banking sector, creating more jobs and promising better compensation packages for middle-class young men and women with tertiary education.

There are many reasons for the expansion in the banking sector in Pakistan. Most importantly, privatisation of nationalised banks spurred growth and increased overall banking standards in the 2000s. The share of private-sector banks in aggregate assets of the banking industry surged from 44 per cent in 2000 to over 77 per cent in 2005.

The Musharraf government brought down the tax rate on the banking business from 58 per cent to 35 per cent, making it at par with the corporate sector. The gradual reduction in the tax rate increased the bottom line of Pakistani banks, as banking became the most profitable sector at local bourses during 2005.

Moreover, the net interest spread, which is the difference in the borrowing and lending rates of banks, reached 8.9 per cent in 2011 as opposed to less than 4.5 per cent in 2005, bringing further profits to Pakistani banks.

The increase of mechanised processes, such as ATMs and internet banking, has also reduced operating costs. According to former State Bank governor Ishrat Husain, the average cost of processing a cheque in 2005 was about Rs50 while that of ATM withdrawal was just Rs15.

A World Bank report published in 2008 said only 14 per cent of Pakistan’s population has access to formal banking facilities. It means the banking industry has the potential to sustain its current pattern of growth for a long time.

“We’re four brothers. Three of us are bankers. I wish my youngest brother, too, had joined banking,” Rizvi said.

Published in The Express Tribune, December 26th, 2011.

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Reader Comments (11)

  • Mobin
    Dec 26, 2011 - 5:54AM

    Considering the fact that only a very tiny fraction of the middle income group is employed in the financial sector, the windfall gains being enjoyed by banks are hardly a boon to the ‘middle class’. Although it is true that bank employees can benefit from cheap credit; the unreasonably high spreads earned by banks, coupled with their unwillingness to lend to private sector, especially the SMEs means that banks have actually not played their role of financial intermediation, satisfactorily.


  • Meekal Ahmed
    Dec 26, 2011 - 4:49PM

    This is all very well but the banking sector is a concentrated oligopoly that makes excess profits (and pays out excess bonuses to its CEO’s). The State Bank is failing in its job of oversight and supervision.

    The net interest rate spread is the biggest rip-off in the country which transfers wealth from the small depositor and hands it to the rich borrower at negative real interest rates. This encourages borrowing and builds up debt and NPL’s down the road.

    I think the 5% interest rates being charged to people who work in these banks when inflation is 11-12% is an unearned and unjustified subsidy and a distortion that sends all the wrong signals in a savings-deficient economy.

    It is equivalent to WAPDA employees getting free electricity.


  • Kamran Butt
    Dec 26, 2011 - 6:48PM

    an exception is discussed in article. bank employees are getting loan at 5 percent then what about rest of the normal customers.
    I personally think that bank loan is like whirlpool never go for a loan unless in case of emergency.


  • Moiz
    Dec 26, 2011 - 10:19PM

    i guess now almost any sort of good news will have too. nonetheless those are impressive stats for pakistan.


  • Falcon
    Dec 27, 2011 - 2:56AM

    @Meekal Ahmed:
    I am glad you answered the puzzle of real vs. nominal interest rates and subsidies. I am sort of awestruck at the amount of subsidies being provided to banking sector employees which are being passed onto the customer in the form of high borrowing costs or low deposit rates. This is going to dampen consumer borrowing and small business borrowing, both of them are the red pills for the economy at this stage and this will also suppress further expansion of the banking sector in the long run.


  • Paki-Australian
    Dec 27, 2011 - 12:32PM

    The rise of the middle class – promising. I like!


  • Adi
    Dec 27, 2011 - 1:31PM

    @Meekal Ahmed…and what does your wonderful knowledge abt economics suggest is the percentage of total staff loans against the outstanding loans of the banking sector?


  • Khurram the Muhajir
    Dec 28, 2011 - 3:19AM

    I have a feeling that these days pretty much anyone can publish an article in Epress Tribune.


  • Pappo Piplia
    Dec 29, 2011 - 2:01PM

    Loans should be reserved for land owning elites only.


  • Xasir
    Dec 30, 2011 - 2:39PM

    Not to mention, that banking spread, the diffrence of rate the bank pays to borrower and the rate it receives on its loans is 7% which is highest in the world. Its all corporate greed. Slash the spread to acceptable levels, and then see how it works.


  • Faisal Memon
    Dec 31, 2011 - 8:30PM

    How the banking industry grew?

    Reduce interest rates, to say 4%
    People borrowed money and invested in assets such as property and stocks
    Property prices increased , on average, say from Rs. 1million to Rs. 3.5 million during the period from 2000-2005. Same followed for stocks.
    Sell property and stocks. Banks loaned Rs.1million and got Rs.3.5million back in deposits.
    The property and stock bubble crashed, however, the banks got more deposits, the losers were the one who held onto non-cash assets.

    Had people used low interest rates to borrow for production purposes rather than consumption, our economy would have been strong.

    This is how the Mushi govt. gave an impression of growth backed by consumer demand fueled by low interest rates and once the interest rates rose… its all clear to us!


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