The State Department web site below is a permanent electronic archive of information released prior to January 20, 2001.  Please see www.state.gov for material released since President George W. Bush took office on that date.  This site is not updated so external links may no longer function.  Contact us with any questions about finding information. NOTE: External links to other Internet sites should not be construed as an endorsement of the views contained therein.

Country Commercial Guides FY 1999: Pakistan

VIII.  TRADE AND PROJECT FINANCING

A.  Brief Description of Banking System

financial reforms introduced in 1990 have liberalized Pakistan's
banking sector, which had long been dominated by state-owned
banks, and private banks are gradually playing a more significant
role.  The government of Zulfikar Ali Bhutto nationalized all
Pakistani banks on January 1, 1974 (two foreign, but non-U.S.
banks, in operation at the time escaped nationalization).  In
December 1990, the GOP announced plans to privatize state-owned
banks and to allow the establishment of private domestic banks. 
So far the government has privatized two formerly nationalized
banks, Allied Bank Limited and Muslim Commercial Bank, and the
State Bank of Pakistan has granted licenses to 14 new private
banks.  The GOP has announced its plans to privatize Habib Bank
by September 1998. Habib Bank is the country's largest commercial
bank in terms of assets.  

There are 25 Pakistani commercial banks, with over 8,500 branches
nationwide.  These banks account for about 75 percent of total
commercial bank assets.

Twenty one foreign commercial banks--of which three are
American--with 87 branches, also do business in Pakistan. Foreign
banks are permitted to engage in a full range of banking
activities.  Foreign banks are subject to higher withholding
taxes than Pakistani banks, but this gap is gradually being
closed.  Most foreign banks may not establish more than four
branches, though at least one exception has been granted to this
general rule.  Otherwise foreign banks are accorded essentially
the same treatment as Pakistani banks.

Bank Assets - U.S. Presence - The three U.S. banks operating in
Pakistan--Citibank, American Express Bank, and Bank of America--
accounted for seven percent of all commercial bank assets in
1994.  All three U.S. commercial banks currently operating in the
retail market (and almost all other foreign banks in Pakistan)
are branches rather than wholly-owned subsidiaries.  (Although
there is no requirement that foreign banks operate as branches,
the wholly-owned subsidiary format would require them to offer
shares for sale to the public at prices below the true market
value). Citibank is the largest foreign bank operating in
Pakistan.  The U.S. banks have, in general, been selective in
their choice of customers, and as a result have what most
observers would agree is a quality client base.  Like all other
commercial banks in Pakistan, their major activity is business
lending; the U.S. banks have a relatively high percentage of
multinational corporations as clients.  Citibank, however, also
pioneered the development of consumer banking in Pakistan and in
1993 became the first commercial bank to offer a comprehensive
program for automobile loans and individual mortgages.  

Commercial banks are engaged predominantly in corporate lending,
with the state-owned and newly privatized banks involved in
various forms of concessionary lending.  The commercial banks are
the main sources of short - and medium-term credit for domestic
investment. 

Consumer banking in Pakistan is largely undeveloped.  There is no
tradition of lending to small individual consumers, and purchases
of automobiles, housing, and consumer goods are generally made on
a cash basis.  Foreign banks generally have sufficient lucrative
business in the corporate sector to absorb their limited credit
reserves.  High interest rates combine with high start-up costs
to discourage initiatives in the consumer sector.  

The State Bank of Pakistan, the central bank, controls the money
supply and credit, supervises the operations of banks,
administers the country's international reserves, and acts as
banker to the federal and provincial governments.  The SBP
formerly set maximum lending rates for commercial banks.  As part
of its move toward more indirect methods of control, however, the
central bank in March 1995 eliminated this ceiling. 

The GOP has pursued a policy of prescribing target levels of
lending to certain sectors of the economy, to ensure that
priority sectors receive adequate credit.  The credit targets
apply only to state-owned banks.  The GOP sets targets for
agriculture, small-scale agriculture, small business and
industry, and tobacco marketing.  The GOP has also mandated a
program of concessionary credit to the private sector through
state-owned commercial banks.  It provides concessionary credit
for export finance, locally manufactured machinery, and
agricultural production loans to small farmers.  The export
finance scheme is available to all commercial banks.  However,
private banks generally make little use of this program and
lending under the export finance scheme is dominated by the
state-owned and newly privatized banks.

In September 1993, the Pakistan Banking Council estimated that
the total volume of overdue loans from the commercial banks as
well as non-ban financial institutions was 81 billion rupees
(about $2.7 at mid-1994 exchange rates).  The defaulted loans are
held almost exclusively by the three largest state-owned banks,
and by the two newly-privatized Pakistani banks; according to the
State Bank Governor, bad loans make up from 10 to 30 percent of
these banks' loan portfolios.  In contrast, foreign banks,
including U.S. banks, have had few defaults and have enjoyed
profitable operations.

There is no system of deposit insurance in Pakistan, although the
State Bank and the Pakistan Banking Council have considered
instituting such a system.  Foreign banks have reacted cautiously
to proposals to establish a system of deposit insurance, because
they fear having, in effect, to subsidize the state-owned and
newly-privatized banks that hold far weaker portfolios.  If a
deposit insurance system is proposed in which each bank is
required to contribute in proportion to its assets, foreign banks
can be expected to oppose such a system vigorously.

In 1979, Pakistan began a program of bringing its financial
sector into conformity with Islamic economic principles by taking
steps to eliminate interest.  The two cornerstones of this policy
are the use of the "mark up" system in bank lending and "profit
and loss sharing" (PLS) for bank depositors.  These two systems
are now used for all rupee accounts in commercial banks; foreign
currency accounts are still based on interest-bearing precepts.

Under the mark up system, the lending institution in effect
purchases a share of the borrower's assets, with an agreement to
sell back the assets when the loan falls due, at a fixed price,
including the "mark up".  If the borrower is unable to pay when
the loan falls due, the loan can be "rolled over", by extending a
new loan for the amount of the original loan plus the previously
agreed mark up amount.  One shortcoming of this system is that
non-performing loans can be "rolled over" indefinitely, so that a
bank's balance sheet may not accurately reflect the viability of
its outstanding loans.  

Under the profit and loss sharing system, banks declare a return
on deposits periodically, based on the profits actually earned on
PLS deposits.  Because banks could theoretically suffer a loss,
this means that depositors' principal as well as return are both
at risk under the PLS system.  In practice, banks announce
expected PLS rates in advance, so depositors have a good estimate
of their rate of return before making a deposit.  The range of
rates paid on PLS deposits is quite wide.

The Islamic Shariat Court in 1990 struck down 22 banking and
financial laws because they condoned the payment of interest,
which is expressly forbidden under Islamic law.  The government,
along with foreign and some Pakistani banks, has appealed the
Shariat Court's decision to the Pakistan Supreme Court, where the
case is pending.  However, the second Nawaz Sharif government
decided to withdraw government's appeal in 1997 and let the court
decide the case on merit.  The Supreme Court has yet to resume
hearing of this case.  A decision is not expected in the near
future. 

A decision by the Supreme Court to uphold the Shariat Court
ruling and insist on the elimination of all forms of interest
would have a significant impact on the banking system.  A ruling
altering the current mark up system or making foreign currency
accounts subject to the mark up system would force U.S. banks to
reassess their operations in Pakistan.  U.S. bankers suggest that
any system requiring the lending party to take an equity stake in
the borrower would cause problems for most foreign banks. 
However, most observers expect that a workable compromise will be
reached, permitting foreign banks to continue operating much as
they do now.

In a major move towards market-based monetary management, the
State Bank of Pakistan removed the cap on lending rates in March
1995, and waived mandatory, Credit Deposit Ratio (CDR - which
links the amount of advances to the level of deposits) in
September 1995.  Removal of CDR was followed by market-based
"Open Market Operations (OMO's - measure to mop-up excessive
liquidity)", in order to restrict expansion in private sector
credit according to the annual Credit Plan target.  The statutory 
liquidity requirement which the commercial banks must maintain
with the State bank was lowered from 30 percent to 25 percent in
May 1997 (20 percent to be invested in government securities and
5 percent as cash deposits).

Commercial banks face considerable competition in attracting
deposits from individuals or small investors; the GOP's national
saving scheme offers attractive rates of return (in the 16 to 18
percent range) on small accounts, which banks find difficult to
match.  The corporate bond market is still in its infancy in
Pakistan; if this form of financial instrument becomes better
developed, banks may also face more difficulties in attracting
deposits from businesses. With increasing competition from more
efficient private banks, portfolios with a significant volume of
bad loans, and the prospect of lowered mark up ceilings, the
state-owned banks will face particular difficulties in attracting
new deposits.

Other financial institutions operate in specialized areas.  For
example, the Agricultural Development Bank of Pakistan (ADBP)
provides credit facilities to farmers and cottage industries in
rural areas.  The Industrial Development Bank of Pakistan (IDB)
provides loans to small and medium-sized industrial enterprises
in the private sector.  The Investment Corporation of Pakistan
(ICP) was established to encourage and broaden the base of
investments and to develop the capital market.  The Pakistan
Industrial Credit and Investment Corporation Limited (PICIC) is
concerned with financing new industries and providing funds for
the modernization of existing industries in the private sector.  

B.  Foreign Exchange Controls Affecting Trading

Pakistan's exchange rate policy is presently based on a managed
float, with the State Bank of Pakistan regularly adjusting the
value of the rupee against a basket of major currencies and using
the U.S. dollar as the intervention currency.

In recent years, the GOP has significantly liberalized foreign
exchange controls.  Individuals and firms in Pakistan may now
hold foreign currency bank accounts and may freely import and
export currency. Foreign firms (other than banks) with
investments in Pakistan may remit profits and capital without
prior SBP approval.

The government in 1994 made the Pakistan rupee fully convertible
for current account transactions.  However, exporters must still
sell their foreign exchange earnings to the State Bank of
Pakistan.

C.  General Availability of Financing

Pakistan's banking sector offers a full range of services,
including foreign trade and working capital financing, term
finance facilities, and retail banking.  Letters of credit can be
routed through the local banks having overseas networks (foreign
exchange transactions are conducted by the bank with overseas
affiliates).  Since credit targets are controlled by the central
bank, it sometimes is desirable to work with several banks in
order to satisfy borrowing requirements.  All borrowing from the
commercial banks is, in theory, conducted on a secured basis,
since unsecured borrowing is not permitted. 

In addition to the commercial banks, Pakistan has about 16
specialized banks and development financial institutions.  The
National Development Finance Corporation (NFDC), the Pakistan
Industrial Credit & Investment Corporation (PICIC) are the
leading development finance institutions (DFIs) providing medium
and long-term loans in both rupees and foreign currency to the
industrial sector.  Their services include participation in
equity through ownership of shares and debentures, underwriting
public issues of shares and securities, assisting Pakistani
investors to obtain foreign investment, assisting foreign
investors to locate suitable investment opportunities in
Pakistan, and providing technical and managerial advice and
assistance.

There also are about 12 investment banks, over 50 modaraba
companies (see description below), and over 24 leasing firms, all
of which have filled a major gap in the country's financial
services sector through the provision of a wide range of
investment banking services.  Through affiliation with major
international financial institutions, investment banks, in
particular, have been able to transfer financial "know-how" and
technology to the local
markets.

The specialized banks include Saudi Pak Investment Company, Pak
Kuwait Investment Company and Pak Libya Holding Company, all of
which are joint ventures providing term financing and equity
support facilities.

In addition, there are the National Investment Trust (NIT), an
open-ended mutual fund, and the Investment Corporation of
Pakistan (ICP).  Both are large investors in the stock market and
provide financing for major projects.

Foreign investors may also utilize the stock market to raise
capital. There are over 775 companies listed on the Karachi Stock
Exchange.

Islamic Modes of Financing - Some of the Islamic modes of
financing available to both domestic and foreign investors (in
accordance with regulatory requirements) are:

Working Capital Finance - "Morabaha": Under Morabaha the banks
provide working capital finance which may be drawn (by checks)
and credited on a daily basis with the facility of an overdraft
account.

The pricing (of debit balances) is calculated on a daily basis at
a rate agreed between the borrower and the bank according to
financial market conditions.  Essentially, the bank and borrower
effect a sale and purchase (in respect of the assets which form
the bank's security), and the difference between the purchase and
sale price establishes the mark up.

"Musharika" is another form of working capital finance by way of
a "partnership" between the borrower and lender based on a profit
and loss sharing agreement.  Working capital finance may also be
provided through discount of bills of exchange.

Term Financing - Term financing is available through a mechanism
known as a Term Finance Certificate (TFC).  TFCs are typically
used to meet the medium and long-term financing requirements of
new projects when the borrower actually sells his project assets
to the financing institution.  Each certificate represents a
definite sum of money, and is transferable in the same way as a
bond.

The borrower's purchase consideration is a fixed installment of
payment over the financing period represented by the TFCs. The
rate of return to the financial institution is derived from the
marked-up amount of the resale price to the borrower.  The mark
up rate is determined in accordance with financial market
conditions, and is agreed between the bank and the borrower when
the facility is negotiated.

Modaraba - A "Modaraba" is similar to a closed-end mutual fund
with certificates listed on the stock market. It is managed by a
modaraba management company which must subscribe to, and maintain
at least 10 percent of the modaraba.  The concept is that the
"manager" and the subscribers to the modaraba's certificates pool
their respective resources of skill and capital in profitable
partnership.  The manager receives a fee amounting to 10 percent
of net profits of the modaraba together with reimbursement of
costs.  The remaining profit is allocated pro rata to all
certificate holders including the manager in his capacity as a
subscriber. 

Modarabas may be general purpose (for various forms of financing
activity) or for a specific purpose (floated as a source of
finance for a specified type of activity or project). Of the
50-some modarabas floated to date, several are engaged in
leasing.


D.  How to Finance Exports/Methods of Payment

Pakistan has a modest export financing scheme, managed by the
State Bank and channeled through commercial banks.  It provides
special credit facilities to certain exporters who have
irrevocable proof of orders.
The preferred means of payment for imports into Pakistan are
against a confirmed irrevocable Letter of Credit (L/C).

E.  Types of Available Export Financing and Insurance

U.S. has imposed sanctions on the use of Export-Import Bank of
the United States (Eximbank) financing, and the USDA Export
Credit Guarantee Program (GSM-102).  The sanctions were imposed
after the nuclear tests of Pakistan in May 1998.  However,
sanctions do not effect the FY98 $10 million PL-480, Title-I
agreement for the sale of U.S. soybeans. Overseas Private
Investment Corporation (OPIC) programs are also not available in
Pakistan due to the sanctions.


F.  Availability of Project Financing

Project financing by the public sector in Pakistan is generally
through a combination of local currency and foreign exchange
credits provided by various donors such as the International Bank
for Reconstruction & Development (IBRD), the Asian Development
Bank (ABD), and other multilateral sources.  Government loans and
grants are also used to finance various projects.  Each public
sector agency and corporation has an annual budget and foreign
exchange allocation.  Most purchases are by international tender
according to the rules of the loan-giving agency or type of
credit.

Since 1967, the United States has won $2.6 billion in overall
procurement.  In 1995, the U.S. won $333 million in procurement
contracts and consulting services.  This represents 9.36 percent
of overall procurement from donor member countries.  The U.S. has
consistently ranked first in consulting services awards,
capturing about 20 percent of total awards every year.

Interested parties should contact the U.S. Liaison to the Asian
Development Bank; Fax: (632) 890-9713.

In its project financing role, the International Finance
Corporation (IFC), a member of the World Bank Group, both
provides loans and makes equity investments.  Unlike most
multilateral institutions, the IFC does not accept government
guarantees for its financing; it attempts to price its finance
and service in line with the market, shares full project risks
with its partners, and seeks profitable returns.  IFC is very
active in Pakistan.  In the last three years the volume of
financing approved by the IFC for its own account for projects in
Pakistan has nearly tripled.  

G.  Types of Projects Receiving Financing Support

Most funding is for government-sponsored and supported
infrastructure development projects, such as power generation and
communications, as well as projects in the environmental and
social sectors.

The Asian Development Bank, headquartered in Manila, is an
international financial development institution owned by 56
member countries of which the United States and Japan are the
largest shareholders.  The Bank lent $5.5 billion in 1995 to
promote economic and social progress in its developing member
countries.  The energy sector received the largest share of
lending, followed by social infrastructure, transport and
communications, agriculture and agro-industry, finance, and
industry and nonfuel minerals.  The Bank's medium-term strategy
focuses on poverty reduction, improving the status of women,
population planning and environmental protection.  The Bank has
also assumed a new role as a catalyst for development.  In
implementing this policy, the Bank will leverage its own
financial resources through co-financing and other techniques to
attract additional private capital in funding the development
needs of its member countries.

A commercial liaison office, which reports directly to the Office
of Multilateral Development Banks  at the Commerce Department in
Washington, assists U.S. suppliers and consultants in winning
contracts on projects and activities funded by the ADB.  The
office includes a Senior Commercial Officer and two (2)
Commercial Specialists.  One of the Specialists represents the
United States-Asia Environmental Partnership (US-AEP) at the
Bank.  The Liaison works closely with the U.S. Executive Director
who represents the United States on the Bank's Board of
Directors.

H.  List of Banks with Corresponding
    U.S.Banking Arrangements

All major nationalized, foreign, and newly established  private
banks have correspondent banking arrangements with major U.S.
banks.  Major foreign and domestic banks operating in Pakistan
include:

       PAKISTANI BANKS                 FOREIGN BANKS

--    Allied Bank of Pakistan      --  ABN AMRO Bank N.V.
--    Askari Commercial Bank       --  American Express Bank 
--    Bank Al Habib Limited        --  ANZ Grindlays Bank
--    Bolan Bank Limited           --  Bank of America 
--    First Women Bank Limited     --  Banque Indosuez
--    Habib Bank Limited           --  Bank of Oman
--    Union Bank Ltd.              --  Citibank
--    Indus Bank Limited           --  Deutsche Bank A.G.
--    Faysal Bank Ltd.             --  Doha Bank Limited
--    Muslim Commercial Bank Ltd.  --  Emirates Bank Intel.  
--    National Bank of Pakistan    --  Hong Kong & Shanghai
                                         Banking Corp.
--    Prime Commercial Bank Ltd.   --  Societe Generale
--    Soneri Bank Limited          --  Standard Chartered
--    United Bank Limited          --  Bank of Tokyo