Function of a Bank — Atif Tufail Featuring Zafar Masud

Function of a Bank is Like Manufacturers, Says Atif Tufail

A recent LinkedIn post by Atif Tufail explores the function of a bank, comparing them to traditional manufacturing businesses.

The post argues that both banks and manufacturers take raw materials and convert them into something of value. For manufacturers, this might be turning raw materials into a finished product. For banks, the raw material is money. Banks take deposits from customers and lenders and then lend this money out at a higher interest rate. The difference between the interest paid to depositors and the interest charged to borrowers is the bank’s profit.

The post also highlights comments by Zafar Masud, president and CEO of The Bank of Punjab. Masud argues that while banks have access to a lot of money (liquidity), they may not have the expertise to invest it in certain areas, such as project financing or low-cost housing. Masud believes banks need to develop new skills and potentially partner with other institutions to make the best use of their financial resources.

Function of a Bank: More Than Just Money Depositors

This post dives into the function of a Bank, comparing them to traditional manufacturing businesses and highlighting an interesting perspective from Zafar Masud, president and CEO of The Bank of Punjab.

Similarities Between the Function of a Bank and Manufacturing Businesses

At first glance, the function of a Bank might seem fundamentally different from businesses that manufacture physical products. However, Atif Tufail argues that they share a core similarity in how they operate.

  • Raw Materials: A manufacturing business acquires raw materials from suppliers, who act as its creditors. These raw materials are then transformed into finished goods.
  • Value Addition: The manufacturing process adds value to the raw materials, creating a product worth more than the initial cost.
  • Sales and Customers: The finished goods are then sold to wholesalers or directly to the market, generating revenue for the business. These buyers become the company’s assets.

How the Function of a Bank is similar to that of Financial Manufacturers

Function of a Bank is similar but their raw material is money.

  • Deposits: Banks acquire money from depositors and lenders, similar to how manufacturers acquire raw materials from suppliers. These deposits become the bank’s “inventory.”
  • Loans and Leases: Banks use these deposits to provide loans and leases to their customers. This is analogous to how manufacturers transform raw materials into finished goods.
  • Interest Rates: Banks charge a higher interest rate to borrowers than the interest they pay to depositors. This difference represents the value addition created by the bank, similar to the markup a manufacturer adds to a product.
  • Fees: Banks may also generate income through fees associated with various services they provide.

Zafar Masud’s Viewpoint on Expanding Function of a Bank

Zafar Masud highlights an interesting perspective on how the function of a Bank can potentially expand their reach and impact.

  • Current Challenges: Masud acknowledges that commercial banks possess ample liquidity (easy access to cash). However, he argues that these banks often lack the expertise and mindset required for project financing, investment banking, and other specialized financial services.
  • Untapped Opportunities: Masud suggests that banks have the potential to make a significant contribution by exploring new avenues. This could involve financing low-cost housing initiatives or supporting businesses that fall outside the scope of conventional banking practices.
  • Thinking Outside the Box: The solution, according to Masud, lies in innovative thinking. Banks need to develop the necessary skillset and expertise to identify the right institutions for specific financing needs. This could involve establishing dedicated teams or collaborating with existing specialists.

In conclusion, the article offers a fresh perspective on the function of a Bank being similar to manufacturing businesses. It also highlights Zafar Masud’s thought-provoking viewpoint on the potential for banks to expand their reach and contribute more effectively to the financial landscape.

Zafar Masud’s Interview with Business Recorder

The above post by Atif Tufail quotes extracts from a conversation is between BR Research and Zafar Masud, in which the President and CEO of The Bank of Punjab explores the transformation underway at The Bank of Punjab (BoP) under his leadership.

Here are the key takeaways:

Empathy as the Core Value:

  • Masud’s brush with mortality instilled a deep sense of empathy, which is now the cornerstone of BoP’s mission.
  • This empathy extends to both customers and previously overlooked sectors like low-cost housing.

Strategic Alliances and Public-Private Partnerships (PPPs):

  • BoP is venturing into new territories like Kamyab Jawan and Punjab Rozgar Scheme, government-backed initiatives offering subsidized loans.
  • Masud sees BoP’s niche as navigating the space between public and private sectors through strategic partnerships.
  • Effective risk management through first-loss guarantees and proper structuring is crucial for successful PPPs.
  • BoP is collaborating with institutions like REALL and PMRC for expertise in low-cost housing and informal sector lending.
  • Alliances with Microfinance Institutions (MFIs) are also being forged to strengthen reach.

Challenges and Opportunities in Low-Cost Housing:

  • The lack of readily available clean inventory and addressing the needs of informal borrowers with limited collateral are hurdles.
  • BoP is taking the first step by collaborating with government agencies and stakeholders to develop a viable ecosystem.
  • The middle class may also be included in future government housing programs.

Organizational Restructuring for Efficiency:

  • A streamlined reporting structure with key business heads reporting directly to Masud reflects a focus on agility.
  • Digital banking is currently integrated with consumer banking for close support during its early stages.

Focus on Deposit Diversification:

  • BoP is actively working to shift its focus from a reliance on government deposits to a more diversified private sector deposit base.

Addressing Legacy Issues and Building Trust:

  • BoP acknowledges the existence of legacy NPLs but emphasizes responsible provisioning and tackling the issue head-on.
  • Improved communication with investors and the market is a priority to build trust.

National Expansion Ambitions:

  • BoP plans to significantly expand its branch network beyond Punjab to achieve its goal of becoming the fifth-largest bank in the country.
  • This national expansion strategy aims to enhance brand recognition and attract a wider customer base.

Islamic Banking as a Growth Driver:

  • BoP is exploring a hybrid model for Islamic banking, combining dedicated branches with windows within conventional branches.
  • A final decision on the optimal structure is expected by mid-2024.
  • Islamic banking is seen as a major driver of BoP’s growth in the coming years.

Potential Diversification Beyond Banking:

  • Establishing a joint venture insurance company with the Government of Punjab is under consideration.
  • BoP is also interested in acquiring a strategic stake in a microfinance bank.

Masud’s Message to the Banking Sector:

  • Commercial banks need to develop the mindset and skillset to explore project financing, investment banking, and unconventional businesses.
  • Collaboration with institutions with relevant expertise is encouraged.

Digitalization as the Future:

  • BoP recognizes the importance of digital banking and is actively building its capabilities.
  • The bank aims to be among the top three in Islamic banking and digital banking within the next five years.

In conclusion, The Bank of Punjab is undergoing a significant transformation under Masud’s leadership. By focusing on empathy, strategic partnerships, digitalization, and new market opportunities, BoP is well-positioned for future growth and success.

Comments are closed.