BankIslami has announced that it will sell its modaraba business – BankIslami Modaraba Investments Ltd – to Atique Ahmed Khan, one of the owners of the Ghani Global Group, in a transaction that is likely to be worth around Rs20 million.
While the transaction itself is not major, it reflects a desire on the part of BankIslami to exit several businesses related to non-banking financial services, which may represent a shift in strategic direction for the bank.
When BankIslami official launched, it called itself the Islamic bank focused on “wealth management”. In reality, however, the bank has done very little with that supposed focus. it does not even distribute Shariah-compliant mutual funds of other asset managers, let alone have its own asset management licence. It only started offering Islamic insurance through some of its branches in 2012, but even that hardly qualifies as wealth management.
Its modaraba business is a tiny one and operates one modaraba fund: Modaraba Al-Mali, in which the bank’s own subsidiary has just a 13% stake. The modaraba fund, in turn, owns basically two real assets: one floor of a non-descript office building on Sharae Faisal in Karachi, and a petrol pump. It also has some cash deployed in various Islamic fixed income instruments, but that is about it.
BankIslami carries this asset on its balance sheet at a value of less than Rs20 million, which suggests that the purchase price for its future owners is likely to be around that much. The bank did not disclose the sale price, and only stated that it was planning to sell the entirety of its shareholding in the modaraba business to the owners of Ghani Global Group.
The sale of the modaraba business is a prelude to the sale of some other assets, including BIPL Securities, which started its existence as KASB Securities, the legendary brokerage firm that was the dominant franchise for retail investors in Pakistan until it was sold as part of the distressed sale of KASB Bank to BankIslami in 2015.
The shift away from non-banking services is likely to herald a focus towards its core banking functions, an area in which the bank has already begun to take a lead. BankIslami Pakistan is one of the leading consumer lending banks in Pakistan, and has one of the largest portfolios of mortgage lending in the country. In addition, it aggressively markets its auto lending and other consumer lending businesses as well.
BankIslami is the second-largest pure play Islamic bank in Pakistan and the third largest by total Islamic deposits (Habib Bank’s Islamic banking division has more in deposits than BankIslami has in total deposits).
Part of the reason why the bank’s deposit base is smaller than its branch network would justify is the fact that the bank does not offer fixed rate deposits, which corporate depositors often want. Given the fact that the State Bank has now made offering fixed rate deposits illegal for Islamic banks, BankIslami may be on a stronger competitive footing relative to its rivals.
It is also the slowest growing of the Islamic banks in the country, having grown its deposit base by a paltry average of just 6.5% per year for the past three years. The Islamic banking industry as a whole grew by an average of 16.5% per year during that same period. Even the slower-growing conventional banking industry grew by an average of 12.1% per year during the past three years.
Why has BankIslami been growing so slow? Out of an abundance of caution. The bank absorbed the effectively bankrupt KASB Bank in May 2015 as part of a forced sale transaction that allowed BankIslami to buy KASB for just Rs1,000. Not Rs1,000 per share. One thousand rupees total for the whole bank.
That sale price led to quite a few banner headlines and more than a few ill-informed accusations of fraud, even though the reality is that KASB Bank was completely bankrupt and had negative equity worth billions of rupees, meaning its liabilities far exceeded its assets. According to one source in Deloitte, KASB Bank had negative equity of at least Rs14 billion.
Mathematically speaking, the owners of KASB Bank are lucky they were not required to pay someone to get the bank off their hands. Because otherwise, they were on the hook for billions of rupees that they likely did not have.
Of course, buying such an unstable bank meant that BankIslami now had to integrate operations and spend time untangling the mess that was KASB Bank while at the same time ensuring that it did not end up creating problems for its own balance sheet. That has meant slowing down the pace of growth and focusing on consolidating operations at the bank itself.
The bank’s profitability appears to be recovering somewhat, with its return on equity going from -1.3% in 2015 to a still tepid, but at least positive, 7.2% in 2019. Given those low profitability numbers, it makes sense for the bank to retrench and shed non-core assets while it seeks to improve the efficiency of its core business.
The purchase of KASB Bank was supposed to have given BankIslami heft in asset management, investment banking, and other non-core banking financial services. That it is now effectively retreating from those businesses suggests that it has admitted defeat in that strategy. And what an expensive admission of defeat it must have been. Because also KASB only cost BankIslami Rs1,000 in disclosed costs, the losses it has borne in the years since them are likely to have been far more expensive.