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Group Members:
M. Usman Sohail Qureshi
Saud Waheed Khan
Mohsin Ali Jawa
Muhammad Usman
Submitted To:
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Environmental analysis refers to the study of all external factors that may affect a
company/industry or its marketing plan. Environmental analysis is a basic marketing function
used to help marketers identify trends or outside forces that may impact upon the success orfailure of a particular product, or businesses. Marketers will look at the economy, political
situation, cultural forces, social conditions, competitors, and legal and ecological factors when
affecting an environmental analysis.
The monitoring, evaluation and dissemination of information from the external and
internal environment to key personnel within the organization constitutes environmental
scanning, which is used to avoid strategic surprises and ensure long term health of the
organization.
Mega environment
Legal Environment
The turbulent situation in Pakistan regarding law and order in civil society is manifesting
itself in financial sector as well. The businesses in Pakistan are increasingly showing signs of
poor legal situations in the country with apparently little or no accountability for business
malpractices.
However, as far as banking sector is concerned the situation is not so bleak. State Bank of
Pakistan with its regulatory authority stamped overall the banks in Pakistan in 1997, has done
more than just a decent job in maintaining control and accountability of all the different banks
operating in Pakistan.
The advent of Islamic Banking and its growing popularity has deemed it necessary for
state bank to look into the new trend. As a result State Bank of Pakistan is working with
stakeholders to develop Shariah-compliant instruments.
Islamic Banking Department was established on 15th September, 2003 and has been
entrusted with the task of promoting & developing the Shariah Compliant Islamic Banking as a
parallel and compatible banking system in the country.
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Currently there are six licensed fully fledged Islamic Banks and twelve conventional banks with
standalone Islamic Banking Branches with the total branch network of over 336 branches
operating in more than 50 cities.1
Political environment
The political scenario of Pakistan has always presented a gloomy picture. Political scene
at the turn of the millennia looked stable and its results were reflected in the progress the country
made on all fronts. But sadly the benefits were short lived as was the stability. After the sad
demise of Benazir and the turmoil that saw the rule of Musharraf coming to an end, the
democratically elected coalition Government of PPP has been unable to cater for inflation and
has seen the country on door steps of bankruptcy. This political instability has translated into
poor economic well being of country and businesses. Banks have also been affected, thought the
effects have been moderated by stringent State Bank policies.
Some studies have linked this political uncertainty to decreased level of investment in
businesses both foreign and domestic that have seen the demise of many businesses, While
others have linked this to high cost of living and interest rates, (Khan, Safdar Ullah and Saqib,
Omar Farooq)
The scandal of Punjab bank was also on political basis. Higher authorities were involved
in it. They allowed people to enjoy from this bank and let them stay in their political positions.
This led to the crisis of the Punjab bank.
Moreover we have seen that bureaucrats first take loans from banks and they are never returned.
This is also because of their political influence in the country.
Economic Environment
Economic Environment in Pakistan is reflective of the global economic turn down. Thecondition however is exacerbated by the poor economic development of the country since past.
Pakistan has had historically a low economic growth rate, a condition that many thought Pakistan
had gotten over with the boom in service sector. But the political turmoil coupled with the
1 http://www.sbp.org.pk/departments/ibd.htm
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recession world over has tightened the noose around the Banking sectors neck. Smaller banks
and financial institutions have had liquidity issues and SBP has played its role in monitoring and
nurturing them when needed. Larger banks have turned more careful in their practices and
Interest rates have soared higher. Although not as profound as on certain other sectors including
the manufacturing and power, the effects of recession has hit the banking sectors from which the
industry is getting out of steadily but surely.
Socio-cultural Environment
Pakistan is a country of rich and diverse culture. People from a broad array of religious
believe, opinions, humanitarianism, languages and attitude live in Pakistan. In addition our
society is evolving steadily. Changes in lifestyle, urbanization and rate of population growth and
age distribution are all element to consider and that will impact the businesses.
As it is imperative that organizations change their goals and objective according to the
prevalent norms and culture, hence we see the advent and flourishing of Islamic banking due to
lack of trust on west and western methods. Islamic Banking has been taken over by most if not
all of the banks in Pakistan. This is because people are starting to realize that commercial
banking is haraam because of certain facts like interest, as interest is haraam in Islam. Some of
the researchers and analysts believe in the fact that most of the problems which are attached in
commercial banking can be resolved if Islamic banking is introduced in the system.
People used to keep their money with them at their homes. But scenario is changing by
days, people are more aware of the banks and more people are keeping their money in banks.
Also there are other offerings from banking sector, which they are offering, based on customer
demands, attitude, beliefs and lifestyles. Banks in Pakistan are adapting to the nations thinking.
Thats why we see several banks opening ways to Islamic banking in their operations.
Technological element:
In the era of information and knowledge-based economy, technology is no more a mere
complementary but a vital element to existence and success. Wealth growth is no more solely
dependent upon nations natural resources, but also on the ability of each country to manage
data, software, communication and telecommunication networks. The technology factor is
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related to the socio-economic factor in the country. In Financial sector, technology is the key
element in safeguarding against dangerous frauds. Now days, technology is everything for a
Bank and Banks performance is highly dependent upon their technology. Technology has been a
major part in reducing frauds like money laundering, etc. As compared to the National Bank
which is lagging far behind from other banks in technological element by several folds, new
banks which are coming up in the market are very tech-savvy offering highly innovative
products to their customers. This highly attracts customers and depositors towards a particular
bank. For instance, internet banking and mobile banking is changing the banking industry in
Pakistan and is having a major effect on banking relationship. We see a fast growth in the
banking industry mainly with the help of technological factors like online banking, mobile
banking, ATMs, online transfers, Telephone banking etc. Technology is one aspect upon which
banks are competing in the market.
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International element:
International element also applies on the Pakistani banking industry. Several foreign
banks have started their operations in Pakistan. There are 6 foreign banks operating in Pakistan:
1. Barclays Bank PLC2. Citibank N.A.3. Deutsche Bank AG4. HSBC Bank Middle East Limited5. Oman International Bank S.A.O.G6. The Bank of Tokyo-Mitsubishi UFJ Limited
Among these, Barclays, Citibank and HSBC have more branches in the country. But still they lag
behind the local banks of the country in many ways. Like they have fewer branches, which mean
they lag behind when it comes to deposits of banks. This shows that foreign banks have less
capital base as compared to local commercial banks. Still they are performing well given the
current economic situation of the country. It is also to be noted that these foreign banks does
compete with local commercial banks when it comes to technology. Foreign banks do have
attractive offerings for the nation for which they are able to attract them. But nonetheless,
international factor does not have a significant importance in the financial sector of Pakistan.
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Microenvironment
The microenvironment surrounding Banking sector can be summarized using Michael Porters five forces
model.
2
Threats of New Entrants
New entry into banking sectors though a possibility but is not a probability in the
investment climate in Pakistan. Due to the deteriorating mega environment in Pakistan as well as
hoard of new stipulations enacted by State bank that requires certain criterion to be met before
one can set up a bank in Pakistan. Only certain large international groups such as Barclays that
have substantial capital and can risk an investment in the unpredictable environment in Pakistan
have recently set up their banks in Pakistan.
A few of the more stringent criteria of opening a bank are as follows;
2 http://notesdesk.com/notes/strategy/porters-five-forces-model-porters-model/
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1. To be able to commence business of banking, the bank should have a minimum paid up capital(free of losses) of Rs 2,000 million or any other amount as prescribed by SBP from time to time
2. At least 20% of the total paid up capital shall have to be subscribed personally by the sponsordirectors.
3. A minimum of 50% shares have to be offered to general public.
To top it the entire existing financial crunch would not allow any major investment in this field.
Bargaining power of suppliers
Due to intangible nature of the financial services Banks lack a product and thus suppliers
in the strict sense of the word. However banks have suppliers in the form of the excess units,
who have surplus money and they want to either save or invest them into banks and other
industries directly or via an intermediary.
The suppliers group for banks consists of three members from the buyer group --- individual
customers, corporate clients, and the State Bank of Pakistan. These groups can exert the pressure on
banks by influencing the interest rates on deposits and advances. The SBP can push banks into buying
more Treasury Bills, or increasing the liquidity/statutory requirements. Recently, the SBP has put a ban
on all "Inami" schemes, limiting banks to cut down new product offerings.
The computer industry is another strong supplier for the banking industry in terms of
hardware, software, and Internet service providers. With banks turning towards modern
technology, especially the usage of ATMs, the computer industry can fluctuate prices of
hardware and software, quoting international price changes. Internet service providers have been
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asked by the government to cut down their rates. Being such an important source of information,
banks cannot do without the Internet hence they have to comply with the price rise.
Utilities companies like the Pakistan Telecommunications Company Limited and the Karachi
Electric Supply Corporation influence the industry through providing communication means and
power supply. Especially with ATMs, banks have to be extra careful that all telephone lines and
power supply lines and means are intact. The ATM at UBL is non-functional due to the reason
that they do not have a dedicated line from the PTCL, and a separate mainframe to run the set-
up.
Bargaining power of the suppliers manifests itself when huge surplus units such as
corporations or sizeable individual accounts come in demanding a specific the rate of return. If
the switching cost and competition is large, a no on part of the bank will definitely result in the
client drifting away.
In todays competitive environment banks have to be flexible in order to accommodate
such suppliers.
Bargaining power of buyers
Bargaining power of buyers depends on the buyer as well as supplier concentration and
on the degree of competition and substitutes available. The deficit units in search of financing
and funds can turn to any number of banks if they offer loans and services that are similar to the
others and are offered at same prices. Around 40 or so commercial banks competing for same
target with similar nature of products and services market. All banks faces a tough challenge in
form of bargaining power of customers since switching cost is low and so many substitutes are
available. Therefore the bargaining power of customers in case of banking is relatively high.
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Substitutes
Substitutes are the products and services of similar nature offering similar value andbenefits to the consumers. Presence of such substitutes decrease the switching costs to the
consumers while at the same time widening their choice set.
Banks face substitutions strongly from USDs (dollars), in consumer psyche, where people still
like to hold savings in the form of dollars and pounds. With the Euro making waves, the nation
might just think of investing in that too.
Disintermediation, vertical integration of clients and e-banking increasingly create
substitutes for traditional commodities, multi-services and capital market intermediation since
the start of the rise of affordable powerful network technology.
Networking with the creation of mix of customers values (low cost, accessibility,
technology fit, flexibility, professionalism, diversification in the capital markets, insurance and
commodities, etc.) becomes a requirement.
The toughest competition banks come across is with the National Savings Scheme (NSS),
which, even with the declining interest rates, is a government backed security giving 14%.
Organizations and customers, looking for higher returns, of course with higher risk also,
invest in the stock exchange. Although a volatile market, long term investment in the stocks,
especially the energy sector, are attracting more investors.
The nature of products and services that they offer in Pakistan are similar to each other as
are their management structures and styles etc. To top it all the customers in Pakistan perceive
these banks to have similar nature of services that further strengthens the competition between
them. In conclusion the threat of substitutes at present remains low and is not a threat to industry
profits.
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Competition
Competition is both direct and indirect in banking sector. The market is loaded withcommercial banks. During the past decade or so there has been an explosive growth in financial
sectors which has seen the Pakistani economy to boom after which it came crumbling down in
2008.
Indirect competition arises in the form of other financial institutions such as leasing and insurance
companies etc.
In general the more intense the competition the lesser is the switching cost, the more options are
available to the customers, which in turn translates into more benefits for the consumers.
Overall Industry Environment
Performance and Prospects
The banking sector began to show signs of a decline in profitability in 2008 as higherinterest rates and spiraling inflation resulted in increasing the cost of deposits and operating
expenses. The level of non-performing loans also increased due to the weaker general economic
environment and higher cost of borrowing. Loan growth was relatively strong at 19%; however,
a majority of new loans was extended to public sector entities with a lower growth in credit
extended to smaller companies and retail customers. Deposit growth in the industry slowed down
as there was a short-term loss of confidence in the health of the banking sector in the third
quarter of 2008.
This trend has now reversed. While a select few banks that have large branch networks
continued to benefit from lower funding costs, for the remainder of the banking sector the cost of
funds increased as a result of the introduction of banking regulations on minimum interest rate
on savings accounts as well as the general rise in interest rates.
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After a period of relative prosperity, Pakistans economy is going through a period of stress
which has resulted in the country going back into an IMF program. In 2008 inflation reached a
33-year peak of 25% and both current account and fiscal account deficits were also high at 8.4%
and 7.4% of GDP respectively. As a consequence of escalating inflation, the State Bank of
Pakistan implemented a tight monetary policy which caused interest rates to rise substantially.
The banking system has shown signs of performance and holds a promising outlook, the
investors maintained their confidence in the banking system and injected additional capital of
around $500 million since 2006 that coupled with retained earnings improved the capital base of
the banks.
The banking sector has strong capital adequacy well above the minimum requirement.
The capital adequacy ratio of the system is 12.1% as of June 08 that is well above the
international benchmark. The nonperforming loans ratio and the ratio of nonperforming loans to
capital were also low and within acceptable ranges. The infection ratio (net) in June 2008 has
improved to 1.1% from 1.6 % in Dec2006, signifying that the banks set aside more reserves out
of their earnings to cover the increase in nonperforming loans. Accordingly, the NPL coverage
and capital impairment ratios have also improved.
Current Performance3Pakistans financial system has grown in recent years, still there is an enormous potential
for growth. The system remains relatively small in relation to the economy, when compared with
other emerging countries in Asia and around the world. This implies that many financing needs
cannot be met and that much of the countrys economic potential remains unfulfilled.
3 Economic Survey of Pakistan 2009-2010
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1) Commercial Banks
The asset base of the banking system and its key elements posted strong growth;
particularly the deposit base and lending to private sector, which consistently declined over first
three quarters of CY09 showed the signs of recovery. However, the asset mix of the banking
system further shifted towards the investment as banks continued to invest heavily in
government papers and bonds of Public Sector Enterprises (PSEs).
As on December 2009, total number of branches of banks stood at 9,522 as compared to
9,146 on 30 June 2009. Hence there is an increase of 376 branches in six months of 2009 10.
Assets of all banks showed a net expansion of Rs 441.9 billion during the first six months of
FY10 and stood at Rs 6,529 billion. Hence the asset base of the banking system increased by 7
percent over the quarter. Deposits of the system, after remaining lackluster during the first three
quarters of CY09, posted heartening growth. Total deposits of all banks registered an increase of
Rs 223.4 billion in the first six months of FY10, and reached at Rs 4787 billion. On the asset
side, lending portfolio also increased. Net investment increased by Rs 344.7 billion during the
first six months of FY10 mainly contributed by private banks amounting to Rs 1375.6 billion.
The public sectors demand for bank credit remained high for meeting budgetary requirements
and resolving the issues of PSEs intercorporate receivables.
Highlights of the Banking System (Rs. Billions)
2005 2006 2007 2008 Sep-09 Dec-09Total Assets 3,660 4,353 5,172 5,627 6,105 6,529Investments (net) 800 833 1,276 1,080 1,593 1,753Advances (net) 1,991 2,428 2,688 3,183 3,119 3,248Deposits 2,832 3,255 3,854 4,217 4,483 4,787Equity 292 402 544 563 641 662Profit Before Tax (PBT) 94 124 107 63 70 91Profit After Tax (PAT) 63 84 73 43 42 54
Non-Performing Loans 177 177 218 359 422 432Non-Performing Loans (net) 41 39 30 109 128 125
Basel-I Basel-llCapital Adequacy Ratio (all
banks
11.3 12.7 12.3 12.3 14.3 14.1
Source: State Bank of Pakistan
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Strong growth in assets of the banking system along with an increase in private sector lending
and investment in PSEs bonds during the first six months of FY10 led to a slight contraction in
baseline indicators of solvency. However, the ratio remains high and in the satisfactory range.
2) Islamic BankingThe growth momentum in Islamic banking has remained exceptionally strong worldwide,
and this trend is shared both at local and global Islamic Financial Services Industry (IFSI).
Despite the remarkable achievement during the past few years, still the Islamic financial service
industry (IFSI) needs careful nurturing and development to make a significant impact on the
financial landscape of the country.
CY04 CY05 CY06 CY07 CY08 CY09(Dec Assets of the Islamic banks 44.1 71.5 119.3 205.9 276.0 366.3De osits of the Islamic 30.2 49.9 83.7 147.4 201.6 282.6Share in Banks Assets 1.45% 1.95% 2.79% 3.98% 4.90% 5.60%Share in Bank De osits 1.26% 1.75% 2.62% 3.82% 4.78% 5.90%
Source: Islamic Banking Department, State Bank
of Pakistan
Despite the robust growth in most of the indicators of Islamic banking during CY09,
there were some slippages in asset quality and a slight decline in financing billion at the end of
December 2009 and reflected a share of 5.6 percent in banking assets. While the total deposits ofIslamic banks reached to Rs 282.6 billion from Rs 30.2 billion in CY04, thus it contributed to 5.9
percent in bank deposits as compared to 1.3 percent only in CY04.
Financing Products by Islamic banks %age
Mode of Financing CY04 CY05 CY06 CY07 CY08 CY09(Dec)
Murabaha 57.4 44.4 48.4 44.5 36.5 42.3
Ijara 24.8 29.7 29.7 24 22.1 14.2
Musharaka 1 0.5 0.8 1.6 2.1 1.8
Mudaraba 0.3 0.2 0.4
Diminishing Muskaraka 5.9 12.8 14.8 25.6 28.9 30.4Salam 0.7 0.6 1.9 1.4 1.8 1.2
Istisna 0.4 1.4 1.4 1 2.9 6.1
Qarz/Qarz-e-hasna
Others 9.8 12.1 3 1.6 5.4 3.6
Source: State Bank of Pakistan
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The high growth momentum in IBIs observed in the last few years stabilized to a more
sustainable pace in CY08, during which the overall banking industry faced with a plethora of
challenges emanating from its operating environment.
In terms of modes of financing, gradual standardization in shariah complaint principles
have helped IBIs in achieving an increased degree of diversification in the utilized modes of
financing. According to the above table, the initial pattern of concentration in financing products
of Islamic banks show that highest share is contributed by Murabaha, Ijarah and diminishing
Musharakah in CY09. Murabaha has still the highest share in financing products by contributing
42.3 percent in CY09. On the other hand Ijarah and Musharakah have sizeable shares with a
share of 30.4 percent; diminishing Musharakah is currently the second most utilized mode of
financing.
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References:
http://www.ameinfo.com/151845.html
http://ezinearticles.com/?Impact-Of-Technology-In-Banking&id=2349968
http://www.sbp.org.pk/
http://www.allbusiness.com/glossaries/environmental-analysis/4966289-1.html
http://www.ameinfo.com/151845.htmlhttp://www.ameinfo.com/151845.htmlhttp://ezinearticles.com/?Impact-Of-Technology-In-Banking&id=2349968http://ezinearticles.com/?Impact-Of-Technology-In-Banking&id=2349968http://www.sbp.org.pk/http://www.sbp.org.pk/http://www.allbusiness.com/glossaries/environmental-analysis/4966289-1.htmlhttp://www.allbusiness.com/glossaries/environmental-analysis/4966289-1.htmlhttp://www.allbusiness.com/glossaries/environmental-analysis/4966289-1.htmlhttp://www.sbp.org.pk/http://ezinearticles.com/?Impact-Of-Technology-In-Banking&id=2349968http://www.ameinfo.com/151845.html