Zafar Masud is the President and CEO of The Bank of Punjab. He has a diverse experience of working across multinationals, public sector corporations, government, multilaterals, and as entrepreneur.

He was the former DG of National Savings, Ministry of Finance; the CEO Barclays Southern Africa; the Founder Partner of Burj Capital; and the Founder CEO of IntraZamin Pakistan. He has served as director on the boards of SBP, OGDCL, PQA, Gadoon Textile, and as the member of the privileged Independent Monetary Policy Committee.

Zafar Masud joined The Bank of Punjab as President and CEO in April 2020 where he heads a network of 636 branches including 104 Islamic banking branches. He is spearheading a huge transformation and progression drive for the bank to move towards an agile digitally abled progressive national bank with positioning in the top banks’ tier. In May 2020, he miraculously survived the PK8303 crash in Karachi.

Mr. Masud is a regular contributor to the local media on the topics of finance, economics and energy and has also published a book on these topics, titled “Out of the Box”.

Following are the edited transcripts of a recent conversation BR Research had with Mr. Zafar Masud:

BR Research: After the traumatic crash incident, what’s your mission in life now?

Zafar Masud: The whole incident has been very traumatic and has given me a whole new perspective of life. Not only have I been blessed with another life, but I have been fortunate to get fame, love and affection of people beyond family and friends. Today, the entire theme, mission and objectives of mine and Bank of Punjab revolves around only one thing: empathy.

BRR: So how would empathy help you turning around Bank of Punjab?

ZM: For one, the value of our people was perhaps reinforced with the incident. That has been ignited within the organization and today you can see Bank of Punjab everywhere. Our mission today is to show compassion towards our customers and empathy towards sectors that have been largely ignored by banks such as low-cost housing. We look at things very differently today than other commercial banks. For example, we look at Kamyab Jawan Program or Punjab Rozgar very differently - as an opportunity to grow our book in unconventional businesses like SME, agriculture, etc. Our experience with the government of Punjab on government funded projects has been particularly good in the past so why not take an aggressive view on that.

BRR: BoP’s main offering was car financing to the SMEs after it opened SME Financing Department back in 2013 and your SME portfolio was very impressive. Automobile is the safest product in consumer finance as well as a successful product within the market. Kamyab Jawan or other such programs are different products. How would your experience in the past help you with these new products?

ZM: There was no first loss there in the past with schemes like car financing for SMEs. The first loss in these current schemes will come from the ministry of finance, but my whole strategy is to work with the government to make sure that that the first loss subsidy and the interest rate subsidy will come from the State Bank of Pakistan on the same format, as we have done on low-cost housing. We need to work with the government and the central bank to get the structure right because these programs will benefit us in the long term; this is what I am trying to explain to the other banks as well.

BRR: The central bank has been pivotal during the COVID-19 pandemic and because of the limited fiscal resource of the government has extended majority of the support to businesses be it the deferment of loans, wage scheme or TERF. And it may provide you with the concessionary finance such as interest rate subsidy, but how would they provide the first loss guarantee?

ZM: The framework of Kamyab Jawan is actually approved by SBP. There is a circular that the SBP issued to all the banks. In case of a default, the central bank will verify if the bank has followed all the principles and guidelines and pay up for it. We are covered for 50 percent of the loss on a portfolio basis.

BRR: The central bank is assuming the risk. Had there been a credit guarantee company, the risk would be borne by that?

ZM: No arguments on that. That has to be done. I have been the founder CEO of the credit guarantee company in the private sector called InfraZamin being set-up with the assistance of Karandaaz and PIDG, UK.

We are working very closely with REALL, which is a Sida and UKAid entity whereby it will provide first loss guarantee to low-cost housing for borrowers in the informal sector, because we don’t have the expertise for evaluating their debt repayment capacities. REALL is an entity that does low-cost housing in emerging markets. This is what we are doing differently from the market, and this is what is motivating my people very much.

BRR: Tell us about your interest in Kamyab Jawan – Youth Entrepreneurship Scheme (KJ-YES) or Punjab Rozgar Scheme?

ZM: In order to uplift the youth of the country by offering opportunities to utilize their entrepreneurial potential to the fullest, Government of Pakistan has re-opened the applications under Kamyab Jawan - Youth Entrepreneurship Scheme for provision of subsidized business loans. At the same time, Government of Punjab has been working on various uplift initiatives post-COVID and “Punjab Rozgar Scheme” was launched by Punjab Small Industries Corporation (PSIC) in collaboration with The Bank of Punjab which aims to provide subsidized small business loans on the similar-lines, with slight variations, as PM’s KJ-YES.

There are four important aspects that need to be looked at. First, both these programs are encouraging entrepreneurship. Second, they are also encouraging the 45 percent of the population, which is right now directionless. The third, most importantly for banks, is that we need to look beyond the initial years into the long-term. The problem is that when we talk about commercial banking, the horizon is one year. We are formally in the large bank category of SBP now with a balance sheet of over Rs1 trillion. With a deposit base of Rs835 billion, we are number nine. This is our responsibility that we live beyond our contractual lives; my contract is for five years, where I should be making policies for 10 years or beyond.

The last but not the least, as you must have also seen that our mission is to become the fifth largest bank in the country in the next 5 years. To get to that point, we need to have a niche in place, and that niche I believe lies in understanding and dealing with the government. Our niche is that we will get into all those businesses where the commercial banks are shying away by managing the risk right and alliances with local and international expert institutions. Our ideology is “public sector risk appetite and private sector ideas”. We will do all those things where private sector ideas are very good and public sector risk appetite will come and handhold them. Nobody is doing that in the market.

BRR: Does this mean that BoP’s niche would be public private partnership (PPP)?

ZM: Essentially yes. BoP is involved in Prime Ministers Kamyab Jawan Program, Punjab Rozgar Scheme and Mera Pakistan Mera Ghar- the low-cost housing scheme, where our aim is to essentially mitigate our risks properly through first loss guarantee and structuring it right. We would be very aggressive in the business provided our risks are managed well. Our theory for that is to engage with the government and ensure that most suitable, mutual beneficial structure to be put in-place, particularly in PPP projects. Bank of Punjab has been the most active bank in terms of giving feedback on low-cost housing and we shall continue to do the same in case of other such schemes as well particularly the one where PPP projects are involved.

BRR: So, tell us how you are adding value to these programs and how are they giving to the society?

ZM: Benefits are pretty obvious. When I talk as a bank, housing and construction contribute 70 percent of the total private sector credit in the developed world. In our case, it is less than one percent. If we can crack the formula as to how will it work for us as BOP, we will be ahead of the game as compared to the others. This growth is imminent because the government and SBP are taking it seriously for all the right reasons including ensuring future sustainable growth in private sector credit.

When I talk about cracking the formula to success, it will come from the learnings that are coming from everyone looking into this segment seriously. At the same time, we are also giving feedback to the central bank as to how it can work. This is the kind of engagement was never there in the past. But today is the right time to find the formula that will work here provided there is ecosystem support and certain regulatory changes as well. Fortunately, we now see receptiveness at the government level because of Prime Minister’s focus on housing and construction sector, specifically in low-cost housing.

The growth of the banks will go onto next level if this window of opportunity opens up. We have to develop skillset for this and SBP is being very vigilant of this by encouraging the banks to go for training and development of their staff, mystery shopping, etc.

Another thing I’m excited for is our alliance with REALL and PMRC because they focus on informal sector. and the real meat for low-cost housing or such programs lies in the informal borrowers for someone like us.

BRR: Most of these informal borrowers or people trying for low-cost housing only have social collateral and the land titles where they live are not clear. How do you plan to address these challenges?

ZM: We have already signed an MoU with REALL whereby we will work together in Pakistan and they will provide first loss guarantee for informal sector borrowers.

Also, I am a big supporter of Microfinance Institutions (MFIs). I believe commercial banks or even Microfinance Banks (MFBs) cannot do low-cost housing alone. You need make alliance with those who understand these borrowers and can handle them through the approach of cooperatives and social collateral. You need to bring in MFIs. We have recently signed up with 6 MFIs within Punjab Microfinance Network whereby we would be planning to extend them up to Rs10 billion funding for financing low-cost housing and agriculture.

BRR: What kind of progress and growth are you seeing in low-cost housing?

ZM: It is slow, and it will remain slow for the time due to various reasons including availability of clean inventory. We need to reconcile with the fact that it will take time before things fall in place as far as low-cost housing is concerned as this is difficult and new arena for bank financing, and everyone is learning on the go. The most important thing is to take the first step in the right direction, and we have taken that step.

An issue on the supply side is the availability of houses with clean title. Our objective is to create that availability by working closely with NAPHDA and the Government of Punjab; we are the agent bank for LDA in an upcoming 4000 apartment scheme. There are six other banks who will work with us on this one. We’re also working on Peri Urban Housing schemes which would provide a clean inventory for low-cost housing for the banks.

BRR: What about housing needs of middle-class borrower who does not fit into low-cost schemes, but also cannot afford to make a house without mortgage facilities? This segment is a key economic driver. How do you see this side panning?

ZM: I would address it differently: informal and formal sector. The acceptance for the formal sector has been there and has even improved. Entities like HBFC that should have been focusing on the informal sector were operating in the formal sector. Issue has largely been of the rates and the liquidity that will only improve with the government stepping in. What I believe is that the government has started extending funding subsidy to the lowest pyramid in the first place and the subsidy may keep on expanding as we progress further to include middle-class in the ambit at some point in time. Things will get better for people as we take off in this initiative.

BRR: What changes have you brought to your organizational structure?

ZM: We have gone back to the conventional structure in the sense that the two business heads: corporate and investment banking head, and consumer and digital banking head report to me along with other departs like HR, finance and admin, treasury, Islamic banking etc. What used to happen before was that all businesses used to report to the Deputy CEO, while the control departments reported to the CEO. One unconventional step I have taken is to make digital banking part of consumer banking because digital banking needs handholding in its infancy. I believe that in its initial years, this business cannot take off if it were to operate as a separate department. We make it an independent department under my direct report once we attain that maturity level in this most critical business for future growth and development for us.

Our entire focus is now on the deposit side to change our deposit mix from predominantly government deposits to private sector. We are a very liquid bank today, with more than adequate reserves and ready to face any possible shocks including the possible introduction of Treasury Single Account in Punjab.

BRR: From the crisis BoP faced in 2008 when NPL went to the roof, what is the situation on that side? Why isn’t the market buying your story?

ZM: The trick with NPLs is that the earlier they are treated, the quicker you get rid of them. BoP has two kinds of NPLs; the stubborn NPLs with legacy issues from before 2008, and they form majority of the NPLs today and will only get marginalized as our balance sheet grows. Being a public sector organization, we cannot take write-off on principal amounts of these NPLs, which is an additional hurdle for us. The new NPLs are much lesser and it’s a wrong observation that our NPLs are very high; the stubborn NPLs from 2008 or even before will stay around till our balance sheet grows.

Our NPLs in the last 10 years would be negligible; we have probably been over-provisioned during this time but that certainly is the situation now as we have implemented subjective classification for the first time in the history of the bank. We have gone to that extent where we thought that there may be a problem over a name that has made the entire banking industry jittery and we have already provisioned for it this year taking an extremely conservative view. 2020 was a record year for us as far as one-off incomes in our profitability are concerned and we had accordingly used these windfalls to make appropriate provisioning with all our marginal names.

Unfortunately, we haven’t set out our story clearly over the years, and it’s important that we communicate it to make investors and the market at ease. Second reason why our share price is so low is because we don’t have a dividend history; a dividend history of only 2 years is nothing, which we have to look into and make it realistic. And third, BoP has always had a very narrow focus of working in the niche of Punjab centric public sector deposits and public sector lending. That’s it. Now if we have the ambition to become the fifth largest bank in the country, we have to grow outside Punjab. Outside Punjab in Sindh and Baluchistan, we merely have 35 branches. Up north and Islamabad, we merely have 100 branches. So, our plan is to go south and up north to expand and grow. Consumer at the end of the day looks at the comparative offering and best service; if you do that, people will be least concerned with the name Bank of Punjab in other provinces. This will also help I believe in promoting inter-provincial harmony, which is the need of the hour for us as the nation.

Balochistan governemnt has given us a contract for e-stamping. In the entire country, we have a monopoly in e-stamping as Punjab is the only province offering this, and we are now doing it for Balochistan. We would be most keen to do the same for KP and Sindh also jointly with Sindh Bank or Bank of Khyber. We will join hands with these banks and offer our expertise in, and they can bring in their network, and we can work together. This will benefit us in the larger scheme of things as a country.

BRR: What are your plans on the Islamic banking side?

ZM: We already have the Islamic banking division called BOP TAQWA. We already have 100 exclusive branches. We are now moving on to the hybrid solution where we will be expanding our exclusive branches; and the second step that we are taking which will be a revolutionary step for us in promoting Islamic banking is opening Islamic banking windows in our conventional setup. We have identified 25 branches as a test, and we already have a consultant working on what would be a feasible format of Islamic banking for us: separate banks – for which we have enough capital - or keep the hybrid Islamic banking division. Anecdotal evidence suggests that a separate bank altogether has not been a very successful model so far; however, we’re evaluating this option with an open mind and by the middle of this year will make the call on which format to follow to ensure that we capitalize on this fastest growing segment in financial sector.

I believe our growth in the next five years will primarily come from Islamic banking.

BRR: Any diversification plans other than Islamic banking?

ZM: We are toying with the idea of setting up an insurance company - both life and general - jointly with the Government of Punjab (GoPb). People usually go general insurance first and life later; we will go the other way round: life insurance first and non-life later. So, Punjab Insurance is one idea we are working on; it will be a joint venture between us and the GoPb & it’s entities.

We are also at the advance stages of entering into microfinance sector. We will be advertising in the media soon our interest in conducting due diligence for acquiring strategic stake in a microfinance bank. Both these sectors are strategic sectors for us, and we would be looking to take positions in any and all projects which are important for our franchise/ stakeholders/ shareholders and the country.

BRR: What message do you have for the banking sector?

ZM: I believe that the commercial banks do have the pocket of liquidity; but they lack the mindset and skillset to evaluate and understand how project financing and investment banking works. Same is for low-cost housing or businesses outside the ambit of conventional banking. The point is that the banks have to think out of the box, go an extra-mile, and develop the requisite expertise and skillset with their own set-up and with open mind explore possibilities of how this liquidity could be diverted to the right institutions who know these businesses the best. Let the experts do their work.

BRR: Digital is the future. What is your view on SBP’s recent initiative RAAST? What is the roadmap of BoP to become digital?

ZM: Raast is the way to go. I was, in a way, part of that project because when we were restructuring national savings, Karandaaz gave us money and at the same time was collaborating with the central bank on this initiative of micro-payment gateway. So, I have been distantly watching that and I am very excited about it. This will revolutionize the banking industry in a big way. There is a debate that it could have been done differently – perhaps should have been done by banks, and that debate may have its own merits. Nevertheless, this was the step in the right direction as we didn’t have any other option. SBP took the step; all kudos to them.

Coming to BoP, the kind of business we are getting into cannot deliver results if we do not rely on technology. There are only three core things in a bank: People, Strategy and Technology. Right now, we have the monopoly on social payments of Punjab. Since 2015, we have done Rs20 billion worth of social security payments technologically and we’re very proud of them as an institution. There are six programs that we have, and they cannot run without technology. Our second niche would be to be among top three banks as far as Islamic banking and digital banking is concerned in the next five years. Some banks already are far ahead, but we would like to catch up with them fast.

We are setting up a team for digital banking. We’ve got one of the best CIOs and CDB Heads in the market. I am very proud of the fact that we’ve got the best team today in the banking sector and we’re all set and committed to meet our objective of “top five banks in the next five years” including in the space of digital banking.