Analysis: Banking in Pakistan attracts China’s attention

ICBC's move to enter the market may cause a flurry of merger activity.

KARACHI: The largest and most profitable bank in the world is seeking to enter the Pakistani financial market, even as American and European financial institutions scale back their presence.

The move by the Industrial and Commercial Bank of China (ICBC) – the largest bank by market capitalisation – to seek a Pakistani banking license is likely to have a significant impact on the local financial sector.

Earlier this month, State Bank governor Shahid Kardar announced that the central bank was hoping to grant a banking license to ICBC before the December 17 visit by Chinese Prime Minister Wen Jiabao. Jiabao is touring several countries as part of a push by the Chinese government to expand the presence of the Chinese financial sector abroad.

Banking sector: expect mergers and acquisitions

The Chinese financial behemoth has a habit of opening up branches in a country before acquiring one of the banks. ICBC Chairman Jiang Jianqing has already stated that his bank plans further acquisitions as part of their strategy to expand their footprint abroad.

There are several small banks in Pakistan that, although not formally up for sale, may welcome an acquisition bid by a strong Chinese financial institution. As many as a dozen banks are currently non-compliant with the central bank’s regulations on minimum paid-up capital requirement, a measure of a bank’s financial strength. Foreign investment, even an outright buyout, is likely to be welcomed by them.

The Chinese wave

ICBC’s expansion abroad has largely been a response to the rapidly expanding Chinese investments globally. In order to stay competitive, Chinese banks have to offer their customers a global presence, or else risk losing their business to American or European counterparts.

It seems natural, then, for Chinese banks to set up in Pakistan where Chinese firms, who have an established relationship with these banks, have been investing significant amounts of capital in recent years.

Chinese firms also tend to be far less sensitive to political risk, evidenced by the presence of around 10,000 Chinese nationals presently in Pakistan. This stands in sharp contrast to American and European firms, which tend to view even unrelated political incidents as a threat to their business.

Published in The Express Tribune, December 15^th, 2010.