Introduction

Financial sector plays a significant role in the economic development. A

very close relationship exists between financial sector growth and

economic growth.1 An efficient financial system is necessary for optimal

use of financial resources of the country. Economic development can be

achieved by using existing resources more abundantly without any change

in the production process or by combining already employed resources in

a better way.2

Commercial banks are in the business of providing banking services to

individuals, small businesses and large organizations. While the banking

sector has been consolidating, it is worth noting that far more people are

employed in the commercial banking sector than any other part of the

financial service industry. Jobs in banking can be exciting and offer

excellent opportunities to learn about business interact with people and

build up a clientele where you can find a way progress for your career.

Today's commercial banks are more diverse than ever before. We can find

tremendous and wide range of opportunities in commercial banking,

starting at the branch level where you might start out as a teller to a wide

variety of other services such as leasing, credit card banking, international

finance and trade credit and agro loan talking about Zarai Taraqiati Bank

of Pakistan. The banking sector in Pakistan has been going through a

1
Khalid Gil, Senior Vice President, Express News, Islamabad , January 16, 2010, p.05
2
Interview with, Saeed Anjum, Director Manager, Kissan Support Service Ltd,
Islamabad, April 03, 2010
18
comprehensive but complex and painful process of restructuring since

1997.3

It is aimed at making these institutions financially sound and forgoing

their links firmly with the real sector for promotion of savings, investment

and growth. Although a complete turnaround in banking sector

performance is not expected till the completion of reforms, but the signs of

improvement are quite visible now in the form of huge opportunity to

catch up with efficient utilization of available resources in our country.

The almost coincident nature of various factors makes it difficult to

straighten out signs of improvement and wear and tear.

Strong competition has forced the banks to adopt new technologies to

redesign business processes, improve products and services, and support

other organizational changes necessary for better performance. That is

why the owner’s of Zarai Taraqiati Bank Limited of Pakistan has adopted

the most important functions of commercial banking like building

deposits, maintaining different kind of accounts, billing system and many

more.

This study has been conducted to high light those specific areas and

factors which are going to be the most noteworthy adopting the modern

world commercial banking factors are like strategic leadership,

competitive intelligence, management of technology, and specific

characteristics of the company's change process propose their respective

3
Ibid
18
importance for successfully implementing business innovation in Zarai

Taraqiati Bank Limited.

While these factors may indeed be important to enhance company

competitiveness, performance in competitive environment, adaptation of

modern banking system, maximize the utilization of company assets in

efficient and competent manner. Moreover, the measurement of

performance while considering these above factors to be the most vital

would be a difficult thing. To make it possible and measureable change in

pattern will be evaluated.

However, many are some other factors which may affect the performance

of Zarai Taraqiati Bank Limited yet they have not been considered on the

assumption that measuring of those factors would not be very useful in

study analysis. Because this study is of quantitative type as some annual

financial report has been underlined.

Objective of Study:

This study is an attempt to analyze the “Impact of Commercial Banking on

the Performance of Zarai Taraqiati Bank”

The main objective of the study is as follow

• Role of commercial banking in the development of Pakistan

• Evaluation of performance of Zarai Taraqiati Bank

Function of commercial bank as a performance indicator

18
Methodology:

The methodology adopted for this purpose includes the collection of

secondary data from annual financial reports and statements of Zarai

Taraqiati Bank.

Secondly various studies and researches conducted by financial

institutions for this purpose, personal interviews with experience workers

of Zara Taraqiati Bank are also conducted to acquire useful information

for this study.

This study design will be more likely longitudinal which measures the

pattern of change in relation to time. The main reason of using this study

design is that it allows the researcher to measure the pattern of change and

obtain factual information, requiring collection on a regular or continues

basis, thus enhancing its accuracy.4

Hypothesis:

The study is based on following hypothesis, the acceptance or rejection on

the basis of following different variables like asset growth, increase in

liabilities, shareholder’s equity and profitability trends to measure the

performance.

Null Hypothesis:

This hypothesis will prove that Zarai Taraqiati Bank has improved its

performance since the commercial banking being started. It has improved

operations, profitability and financial leverage.

4
Ranjit Kumar, (2008), Study Design, Research Methodology, (2nded.),
Pearson Education Australia, New Dehli, India, p. 97
18
Alternative Hypothesis:

Hypothesis two will prove that Zarai Taraqiati Bank has not improved its

performance, operations, profitability and financial leverage along with

the functional changes being done by State Bank of Pakistan.

Chapter Review:

First of all this chapter discuss the importance of different factors like

commercial banking, economic condition for the purpose of simplicity

about the problem statement. Secondly the objective of study is explained

to further clear the topic. Thirdly the research methodology is explained

and finally hypothesis is built to further more prove the research topic.

18
 LITERATURE REVIEW

Banking is one of the most sensitive businesses all over the world. Banks

play very important role in the economy of a country and Pakistan is no

exemption. Banks are guardian to the assets of the general masses. The

banking sector plays a significant role in a modern world of money and

economy.5

Pakistan has a developed banking system, which consists of a wide variety

of institutions ranging from a central bank to commercial banks and to

specialized agencies to cater for special requirements of specific sectors.

The country started without any worthwhile banking network in 1947 but

witnessed phenomenal growth in the first two decades. By 1970, it had

acquired a flourishing banking sector.6

It influences and facilitates many different but integrated economic

activities like resources mobilization, poverty elimination, production and

distribution of public finance. It is purchase of car or building of home

banks is always there to serve you better. It is an industrial project or

agricultural development of the country the sponsor-ship of banks is very

much involved. Banks play very positive and important role in the overall

economic development of the country7

5
Annual Report Asian Development Bank, Mahmood ul Hassan Khan, "Media Monitor
Networks” Banking Industry of Pakistan, Vol.724, July 24, 2004, p. 04
6
Ibid, p.05
7
Ibid, p.05
18
According to statistics of quarter ended June 2009, share of agriculture in

net advances stood at 4.7 Percent, thus it is amounting 150.5 billion in

contrast to 4.9 percent in the previous quarter. Zarai Taraqiati Bank is a

specialized bank that had Rs.75.92 billions advances and has 158 branches

across the country. A Very small number of people living in the rural

areas have bank accounts.8 Financial inclusion in the country is

reflection of the regulation’s strategic inclination towards including rural

non- banking. Recent measures introduced by the central bank to expect

financial inclusion range from tax holidays and flexible regulations to

micro financing. This is where commercial banking comes in the form of

Zarai Taraqiati Bank Limited. 9

In the banking sector, according to an analysis, average deposit rate

of6.3% in September 2009 has decreased by 150 bps, from 7.8 percent

during the corresponding month of the last year. Slow down economic

growth, double digit inflation during 15 months and prevailing uncertainty

in law and order situation and war on terrorism. These are the additional

factors contributing towards slow growth of deposits. It is pertinent to

observe that banks have remained oblivious to increasing deposit rates.

These deposits repeated assertion made by the previous government of the

SBP.10

8
Tariq Ahmed Saeedi, Financial Inclusion of Rural Economy , Pakistan # Gulf
Economist, , October 26- November 1,2009, p. 20
9
Ibid
10
Fozia Arooj, Review of Banking Sector, Pakistan # Gulf Economist, December 21-27,
2009, p. 7
18
During the last one decade, Pakistani banking system has gradually

evolved from a weak state owned system to a slightly healthier and active

private sector driven control. The private sector controls nearly 80 percent

of the system assets, as opposed to the early 1990s when 90 percent of the

system assets were controlled by the government. According to one

estimate, banking system in Pakistan is made up of 53 banks, which

includes 30 commercial banks, four specialized banks, six Islamic banks,

seven developments financial institutions.11

The four largest commercial banks account for 44.2 percent of system

assets, while eight second-tier banks accounts for a further 35 percent

indicating moderate concentration. The country’s commercial banking

sector has the potential to grow further and its expansion is crucial for

national economy. So development banks like ZTBL which is a

development banks initially, going to be a commercial bank for multiple

of good reasons.12

A survey conducted to find out the reasons of lower usage of bank loans

by rural population found that from people side interest based financing

was a hurdle in utilization of financial assistances. People are reluctant to

take loans because of the margins charged (Interest) on them, are violation

of Islamic injunctions or against Shariah. Therefore, Shariah- complaints

financing can be a booster to financial inclusion. Majority of the farmers

11
Syed Fazl-e-Haider, Evolution of Pakistan Banking Sector, Pakistan # Gulf Economist,
December 21-27, 2009, p.20
12
Ibid
18
take loans from informal sources like friends, family, input suppliers and

arties. This is how the ZTBL in fundamental approach for every farmer to

go and get loans.13

For reforming the banking and financial system in response to financial

crisis of 1996, implementation of the Government’s banking and financial

sector strategy started in earnest 1997 and is well advanced. There is a

broad agreement between the government and the Bank on the vision for

Pakistan’s financial system - a market oriented, predominantly privately

owned banking and financial system and a financial system that operates

under strong regulatory framework, is supported by an effective legal and

judicial service, consequently, the Bank Group and Asian Development.

Bank has been actively supporting the implementation of the strategy with

adjustment lending, restructuring and privatization operations, technical

assistance to strengthen the financial infrastructure, including the payment

system, credit information and anti money laundering, and expanding the

micro finance sector. Priorities include adhering to the privatization

schedule for the Non Commercial Banks, closing most of the (DFI)

Development Financial Institutions, improving the legal and judicial

system for financial contract dispute resolution, and achieving full market

integration by phasing out special credit programs and closing tax and

regulatory arbitrage opportunities.14

13
Tariq Ahmed Saeedi, Financial Inclusion of Rural Economy, Pakistan & Gulf
Economist, November 1, 2009, p. 20
14
Annual Report Asian Development Bank, Khalid Mahmood, ”Pakistan Country
Assistance Strategy”, Vol.755, July 6, 2007 Annex II, p. 23 of 23
18
Profitability of commercial banks in Pakistan is on downward trend

according to results of last calendar year, decreasing 25 percent to a little

over Rs 50 billion as compared to Rs 66 billion in 2007. Remember,

decrease in profits does not imply loss. Actually they earned profit s

because of continuous product diversification and innovation, high spread

between rates of mobilizing capital and credits (deposit and lending) and

substantial earning on government securities such as treasury bills.15

Performing more than ordinal dual functions of deposit mobilization and

advances extension, the bank in developed nations have broadened their

description of functions, maintaining portfolios as investment bank,

buying debts of countries, managing complicated and sophisticated system

of various derivatives in commodities. In Pakistan, though, debt buying

has appeared as profitable option as seen in recent thorny issue of circular

debt.16

The overall profitability of commercial banks (24 banks as financial s of

Bank of Punjab are not available) for the year 2008 shows a decline of

24%. This was mainly due to provisioning against non- performing loans

and advances, impartment cost. Another key reason affecting profitability

of banks is steep rise in administrative expenses. Many analyst s fail to

understand this phenomenon because now most of the services are

provided at very high cost, worst being deduction s for not maintaining
15
Annual Report Asian Development Bank, Khalid Mahmood, ”Pakistan Country
Assistance Strategy”, Vol.755, July 6, 2007 Annex II, p. 23 of 23
16
Tariq Ahmed Saeedi, Bright Growth Prospects For Banking Industry, “Pakistan &
Gulf Economist”, April 20-26, 2009, p. 07
18
minimum balance. It is interesting to note that while most of the banks

have fixed a minimum balance requirement. This condition must be

abolished at the earliest to encourage small savers to keep their money in

the banks.17

Pakistan’s banking system has effectively coped with several challenges

emanated from economic slowdown worldwide, mainly because of strong

resilience built over the years and effective regulatory and supervisory

regime. According to the State Bank of Pakistan’s quarterly performance

Review of the Banking System for the quarter ended December 31m

20008 released recently , growth rates, credit risks, and earning of the

banking system are likely to remain under strain in future due to

constrained economics environment both at home and global fronts. Low

demand for bank’s advances will shift asset mix away from advances to

government papers, and deposits are likely to grow at steady pace.18

Banking sector of Pakistan has been transferred over a short period of

around eight years from a sluggish and government oriented sector,

largely bureaucratic culture, into a much more competitive and profitable

industry. In recent years, the healthy performance of financial sector and

in large part banking sector has been crucial for economic growth.19

17
Shabbir H.Kazmi, Declining Bank’s Profitability, “Pakistan & Gulf Economist”,
April 20-26, 2009, p.07
18
Kanwal Saleem, , Banks and DFIS Growing, “Pakistan & Gulf Economist” , April 20-
26, 2009, p. 17
19
Sumaira Fazal, Banking sector of Pakistan- A key Growth Driver of The Economy,
“Pakistan & Gulf Economist”, September 15-21, 2008, p.09
18
The overall banking industry of Pakistan has undergone a huge leveraged

volume expansion. The banks have increased their geographical outreach,

via opening up of new branches by many folds. In fact, the increasingly

competitive environment has led to the massive expansion. This has, in

turn, resulted as; customer service, improved geographical coverage and

product innovation. All major reforms in the banking sector have resulted

in a more resilient and efficient banking system, which is better placed to

absorb significant macroeconomic shocks. 20

While there are so many positive factors, the banking industry also

remains prone to various challenges steaming form operating

environment. The State Bank of Pakistan, in persistence of its tight

monetary policy, made changes in discount rate, Cash Reserve

Requirement. The central bank tried to slash bank’s lending ability that

has been a cause of heavy financing to the government particularly and

also exerting some pressure on the interest rate spreads, thus reducing

overall top line growth of the banking industry.21

Pakistan is a country with very high population growth rate of 2.14%

yearly, considering this huge population growth rate, there is big market

potential for consumer banking related services. The banking industry is

no exception to this, until and unless the common man in not being

provided with banking facility at an individual level, the growth of

20
Sumaira Fazal, Banking sector of Pakistan- A key Growth Driver of The Economy,
“Pakistan & Gulf Economist”, September 15-21, 2008, p.10
21
Ibid
18
banking industry cannot be sustained. There is a need to bring a greater

percentage of Pakistani population into the banking system and until and

unless banks do not reach out for the masses it will not be possible 22

As far as impact of State Bank of Pakistan’s monitory policy on banks is

concerned, the increase in Cash Reserve Requirement would reduce

liquidity for banks and would consequently impact deployment of funds.

The year 2008 has proved to be the toughest year for the banking industry,

mainly because of the above discussed strict measures taken by the

regulator, that have dented the banking sector earning, though it still

remained at a very comfortable level. The initial set back to the industry

was the plunge in the net earnings of around 16% during the first quarter

of 2008 owing to the incremental provisioning banks had to make on the

back of removal of Forced Sale Value benefit by the State Bank of

Pakistan.23

As for as growth in Pakistani banking industry is concern, banking

industry of Pakistan bleak or can banks operating in Pakistan cower while

taking expansionary plans across the country what their counterpart in

developed economies did because of financial downturn or because they

reach to a penetration point downturn proved just an excuse of rolling

back further expansion locally and internationally. Considering a

22
Amanullah Bashar, Consumer Finance Plays Vital Role in Economic Growth, Pakistan
& Gulf Economist, June 1-7, 2009, p. 06
23
Ibid
18
diminutive operational base of banks in Pakistan, it would not master

expert analysis to answer no.24

Even after taking into consideration all that is known as financial sector

including insurance, stock market, non banking financial institutions, etc.

This base has huge space to expand to engulf a large number of bankable

Pakistani population. Therefore, when governor State Bank of Pakistan

Syed Salim Raza said, “With confidence banking industry of Pakistan has

immense to be explored, he was quite right as only about 8.6 million

people are presently using banking services nationwide. But his utterance

that interests of foreign investors in banking industry have not been

dimmed in spite of macroeconomic imbalances raises some doubts.”25

The outcry for loans write off appeared in public with a force and went

hoarse before becoming purposeful in taking to the task, those who did not

deserve to get their loans written off. Many a time, such undeserved favors

have been coming into limelight, but no avail and reports bluntly

highlighting the names and magnitude of loans written off turned out to be

a vehicle of point scoring or political gains making one or two responsible

for assisting such acts of robbers.26

There were reports which indicated that a total of Rs. 60 billion was

written off during the last government. They named several individuals

24
Tariq Ahmed Saeedi, Bright Growth Prospects for Banking Industry, Pakistan & Gulf
Economist, April 20-26, 2009, p. 14
25
Ibid
26
Tariq Ahmed, Loan Write-Offs Go Unnoticed, Pakistan & Gulf Economist, December
21-27, 2009, p. 21
18
from politics, non service military personnel to business community, who

got their loans written off by different financial institutions, no one was

explaining why these people were needed to write off their loans.

Reportedly, National Bank of Pakistan had the large chunk of loans

written off followed by Zarai Taraqiati Bank of Pakistan27

There are genuine cases of non-performing loans for example when

borrower loses its ability to repay or has no other means of repayment.

But, there were habitual defaulters who are used to borrow huge amounts

from the financial institutions against pledges worth below than the

principal amount of loan, Subsequently, non-performing loans leaves

financial institutions with overvalued liquid assets of defaulters, which

hardly compensate a small part of the infected assets.28

Over the last decade or so, Pakistan has experienced an exponential

growth of consumer banking and in the rest of the banking industry. This

extraordinary development has followed privatization of nationalized

banks, banking reform brought about by the State Bank of Pakistan and an

increasingly marketing oriented approach which has primarily targeted a

large urban consumer base.29

The increasing competition and rivalry among competitors along with

consistently increasing customer requirement have led to enhance

27
Ibid, p. 21
28
Ibid, p. 22
29
Atif Hassan, Handling Mass Records in Consumer banking, Pakistan & Gulf
Economist, June 1-7, 2009, p. 09
18
awareness amongst banks on the prospective and significant information

technology in banking. The arrival of foreign and private banks with their

superior state of the art technology based services has pushed Pakistani

banking infrastructure. A combination of regulatory and market force has

supported the implementation of technology and automation in the

Pakistani banking industry.30

Banks and financial institutions have recognized information technology

as an enabler of sophisticated product development, better market

infrastructure, and implementation of reliable techniques for the control of

risks. This helps the financial analyst’s to reach geographical distance and

diversified markets. With continues and rapid advances in technology, the

banking sector has seen a revolutionary wave.

The overall profitability of commercial banks shows a decline of about

24%. This was mainly due to provisioning against non-performing loans

and advances, impairment cost, and increasing administrative expense.

Provisioning against non-performing loans amounted to Rs. 62 billion for

2008 as compared to Rs. 50 billion in previous financial year 2007. As the

private sector demand is on the decline and government’s borrowing is on

the rise, commercial banks found investing in Treasury Bills high yielding

as well as more secure.

Banks and other financial institutions are the heart (centre) of any

economy, and they help the different sectors of the economy to move
30
Ibid
18
along with high degree of attraction to the centre, so that the economy

remains strong and resilient to the external factors. The above review of

banking sector, financial inclusion, and evolution of banking sector, rise

and fall in growth as well as in profitability, is vital in understanding the

importance and need of changes in overall banking sector’s infrastructure.

Chapter Review:

This chapter is the appreciation of previous efforts had been made by

various researchers and economist about the economic condition of

financial sector in Pakistan. This study also includes the fabulous

parameters with measures the performance of banking industry and it had

been progressing during the critical and key point of time in past few

years.

18
 Company Profile and History

Zarai Taraqiati Bank of Pakistan is the largest agriculture bank in the

country. It has many branches in all over the country. The bank has multi

services and investment plans for the development of agriculture in

country. Their corporate vision is to serve the needs of the farming

community, by delivering financial products and technical services on a

competitive and sustainable basis, in a convenient, efficient and

professional manner, leading to success of the Bank and the farmers.

Their corporate mission is to play effective role in the promotion of

economic growth, by enhancing the availability of credit to the agriculture

sector, through reliable access to sustainable financing, special lending

programs, technical assistance, products & services, and to promote career

development opportunities for increasing professionalism and technical

proficiencies of employees.

Zarai Taraqiati Bank is a specialized bank providing agricultural credit

facilities to the farmers and agro related businesses in Pakistan. The bank

enjoys supreme ruler guarantee of the Federal Government Pakistan that is

State Bank of Pakistan and ensures safety of deposits under the Banks’

(Nationalization) Act 1974. Bank is largely funded through State Bank of

Pakistan’s credit lines while contribution from deposits remains nominal.

ZTBL is actively exploring different options and opportunities for

resource mobilization including bilateral/multilateral arrangements with

financial institutions. In case these efforts materialize; it would diversify

18
the existing funding source of the bank, thereby reducing reliance on the

State Bank of Pakistan. The Government of Pakistan has a rate of 8% on

loans right now which was about 14% previously. Consequently, it has

markup recovered which means bank is making profits.31

Moreover, the bank’s failure to service its debt on account of financial

constraints had prompted it to put forward a debt restructuring plan to

State Bank of Pakistan for settlement of the entire loan. State Bank of

Pakistan agreed to the proposal except for the capping of markup rates at

2.4% and proposed another restructuring plan according to which the

entire debt and markup differential will be settled without putting any

burden of cash outlay on Government of Pakistan. The proposed plan

would increase investments of the Government in Zarai Taraqiati Bank

Limited by Rs. 33.9 billion in the ratio of 50% as equity and 50% as

interest free loan.32

The plan is expected to be finalized soon. Of the remaining proceeds from

Asian Development Bank’s loan for project financing, Zarai Taraqiati

Bank Limited has made the first move for the restructuring process of its

information technology infrastructure in line with a comprehensive five

year strategy. Initially, integration of branches with zonal offices and head

office is on the go, while a variety of software applications have been

31
Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL,
“JCR_VIS Credit Rating Company limited”, June 30, 2009, p.02
32
Ibid, p.02
18
developed to enhance loan disbursement and monitoring in order to make

it error free system.33

The bank has also improved upon its data storage and backup facilities.

While Zarai Taraqiati Bank Limited charged off Rs. 3.3 billion (FY08: Rs.

3.6b), there was a significant decrease in provisioning during the year at

Rs. 1.9b (FY08: Rs. 3.1b) on account of declining fresh Net Profit Losses.

Consequently, asset quality indicators have depicted an improvement with

net infection decreasing to 7.4% (FY07: 12.2%) while net NPLs as a

proportion of net equity was also lower at 30.7% (FY07: 52.5%). As a

consequence of raise in salaries, administrative expense witnessed an

increase to Rs. 4.5b (FY07: Rs. 3.8b). The bank’s overhead and efficiency

ratios are relatively higher at 4.6% (FY07: 4.2%) and 43.4% (FY07:

41.3%), respectively. Amidst fixed pricing regime, spreads improved to

3.5% (FY07: 2.8%) on account of better return on placements with

financial institutions. Furthermore, there was substantial support to

profitability in Financial Year 2008 from recoveries while fresh

provisioning was also lower as compared to the preceding year.

Resultantly, net profit increased to Rs. 2.6 billon in 2008 (FY07: Rs. 1b).34

Zarai Taraqiati Bank Limited (ZTBL), formerly, Agricultural

Development Bank of Pakistan (ADBP), was formed through the repeal of

Asian Development Bank Ordinance 1961. ADBP was established

33
Ibid, p.03
34
Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL,
“JCR_VIS Credit Rating Company limited”, June 30, 2009, p.04
18
following the merger of Agricultural Development Finance Corporation

and Agricultural Bank of Pakistan. Zarai Taraqiati Bank Limited took over

all assets, business, contracts and liabilities of ADBP and started its

countrywide operations as a public limited banking company on

December 14, 2002. The bank has the express authorization to provide

finance and credit facilities to small farmers’ agro related businesses and

low-income households which ultimately leads to economic growth of the

country.35

Originally, the Agricultural Development Bank of Pakistan (ADBP) was

established under the ADB Ordinance, 1961 as it has been discussed quite

few times in this study. Subsequently Agriculture Development Bank of

Pakistan was reorganized into a public limited company, with the purpose

of ensuring better governance and the provision of high quality financial

services to its rural clientele. Accordingly, Zarai Taraqiati Bank Limited

(ZTBL) took over all assets, business, contracts and liabilities of ADBP

and started its countrywide operations as a public limited banking

company on December 14, 2002.

The bank’s objective is to provide agricultural credit to farmers located in

rural areas and to low income households of the country. At present,

ZTBL operates with 342 branches divided into 25 zonal offices with the

principal office situated in Islamabad. The conversion of Agriculture

Development Bank of Pakistan into Zarai Taraqiati Bank limited had a

35
Ibid, p.05
18
conditionality of the Asian Development Bank (ADB) loan framework as

per which a restructuring exercise was started. The restructuring process

entailed ADB’s Rural Finance Sector Development Program (RFSDP)

with the objective to transform ZTBL into a sustainable Rural Finance

Institution.36

It also included the up gradation of Information technology (IT)

infrastructure for which funds from ADB’s loan were to be utilized. As

part of the overall organizational restoring strategy, the bank has taken

several initiatives to enhance its lending activities while adopting a

prudent approach with regards to credit quality. Kisaan Support Services

(Pvt.) Limited (KSSL), a subsidiary of Zarai Taraqiati Bank limited, has

been engaged to sell fertilizer to farmers at subsidized rates, while a

Memorandum of Understanding (MoU) is signed between Kisaan Support

Services (Pvt.) Limited and Pak Arab Fertilizer to ensure timely

availability of agricultural inputs. During 2008, ZTBL signed another

MoU with the Department of Agriculture, Azad Jammu and Kashmir

(AJ&K) under the title of ‘Green Tractor Scheme’.37

The scheme was introduced to promote mechanized farming in AJ&K by

providing tractors to the farmers. Zarai Taraqiati Bank Limited will

process loan applications recommended by the Department of Agriculture,

AJ&K for purchase of tractors as per prices fixed by the bank. The loan

36
Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL,
“JCR_VIS Credit Rating Company limited”, June 30, 2009, p.07
37
Ibid, p.07
18
will be recoverable in 5 years equal semi-annual installments commencing

after six months of disbursement. Farmers will make full payment of each

installment to the bank and claim reimbursement by showing the bank’s

receipt to the Department of Agriculture, AJ&K. One farmer will be

eligible to avail the facility of one tractor at a time and may apply for a

second loan after clearing the previous one in full.38

Similarly, Government of Punjab has decided to launch ‘Green Tractor

Scheme 2008-09’ for the farmers of Punjab Province. The provincial

government allocated funds of Rs. 2 billion for provision of subsidy @ Rs.

200,000/- per unit for 10,000 tractors. Farmers are selected through a

balloting process and may purchase tractors on cash or credit from any

bank. ZTBL is collaborating with the government of Punjab for successful

implementation of the scheme by catering for credit needs of eligible

farmers. Furthermore, Government of Pakistan (GoP) provides funds in

order to look after the production credit needs of registered farmers under

‘Crop Maximization Project’. Disbursements under the said scheme began

in June 2003 and Rs. 655.4 million has been disbursed for the purpose

since inception, with a recovery ratio of 98% as at December 31, 2008.

During FY08, disbursements amounted to Rs. 160.1million and the

recovery ratio stood at 94%. 39

38
Annual Financial Report, Maimoon Rasheed, Amir Shafique, Credit Rating of ZTBL,
“JCR_VIS Credit Rating Company limited”, June 30, 2009, p.08
39
Ibid, p.08
18
The bank has also arranged an insurance cover for five major crops, dairy,

livestock and tractors from M/s Adamjee Insurance Company Limited.

The insurance will be mandatory for all new borrowers availing loan from

ZTBL. To facilitate the borrowers in calamity hit areas, the insurance

company will conduct a survey of the affected areas much before the

official declaration by the government so that the borrowers may be

compensated on timely basis. Annual premium will be charged @ 1.9% of

the disbursed loan. On renewal, the principal outstanding will become the

sum insured.40

40
Ibid, p.09
18
 Performance Analysis and Review

In this study the performance analysis will be done by calculating different

financial ratios which is a quantitative measure. Some qualitative

measures will also be considered to evaluate the performance of Zarai

Taraqiati Bank.

Zarai Taraqiati Bank is needed to make big Changes in Information

Technology Infrastructure, therefore, in the process of streamlining the

Information Technology & Management Information System (MIS) under

the project loan sanctioned by Asian Development Bank. For that purpose,

a comprehensive five year strategy has been adopted to acquire,

implement and train the relevant Human Resource Management. Medium

to long term goals are established, meanwhile objectives are set which is

properly approved by the Board of Director. As a preliminary step, all

zonal offices (including the head office) have been upgraded to use

communication network protocol for efficient emails and circular

management system. This advancement has been done to facilitate the

employee’s work efficiency.41

As per State Bank of Pakistan’s directions, data cleansing exercise has

been started while a number of Business Process Reengineering (BPR)

like pilot projects were introduced to ensure efficiency in loan processing

and monitoring with help of Kisaan Support Service Limited. This is the

41
Aamir Shafique, Annual Financial Report 2009, VISC Credit Rating Company
Limited, June 30, 2009, p.02
18
best ever project initiated by the managing director of Kisaan Support

Services (Pvt.) Limited. Of the various projects executed, some notable

ones include restoring of Loan Processing System (LPS), Deposit

Management System (DMS), SAM Data Cleansing System, Internal

Credit Risk Management System and Internal Audit Facilitation System

(IAFS). Previously, all branches were using a manual system for handling

of deposits, except for the head office where a Common Business Oriented

Language (COBOL) system was implemented.42

Deposit Management System is an integrated retail banking solution

software program having the power to generate comprehensive reports and

queries for internal and external purposes of the accounts. The system

allows real time updating of the database and has enhanced security

features with installing the backup power programs. Initially, 250

branches have been selected for implementation of Deposit Management

System. While deployment all selected branches of Punjab and Sindh has

been completed, implementation in Baluchistan and NWFP is in progress

now a days. The installation of Local Area Network (LAN) comprising

600 network nodes is complete and ready to use. In addition, Wide Area

Network has also been made available in all zonal offices along with 275

branches. Implementation of Wide Area Network in the remaining

branches is under progress.43

42
Aamir Shafique, Annual Financial Report 2009, VISC Credit Rating Company
Limited, June 30, 2009, p.02
43
Aamir Shafique, Annual Financial Report 2009, VISC Credit Rating Company
Limited, June 30, 2009, p.03
18
For the discovery of Credit Rating Risk, according to annual Financial

report of year 2008 Gross Advances Portfolio increased to Rs. 77.8 billion

(FY07: Rs. 70.5b), which was growing by 10.4% every year so far the this

growth is in upward shift. During the year, loans of Rs. 70.7 billion

(FY07: Rs. 55.9b) were disbursed against a target of Rs. 65 billion in

Financial Year 2008. Total number of farmers served was 571,946 in

comparison to 475,756 last year, showing an increase of 20.2%. In

Financial Year 2009, the bank has targeted to reach 600,000 farmers

which were achieved in only 8 months.44

Primarily, disbursements have been made in production loans while

around 17% of the fresh portfolio is intact includes loan for development

purposes. Punjab remains the largest beneficiary with around 80%

disbursements, whereas Baluchistan comprises the lowest share of 0.2%

only. However, the bank intends to enhance its outreach in Baluchistan,

going forward. Over the years, the bank has been making material efforts

to recover over dues on loans.45

Of the total recoverable loans, recoveries to the tune of Rs. 65.9 billion

(FY07: Rs. 58.1b) were made with recovery ratio improving to 86%

(FY07: 80.9%) during Financial Year 2008 and in last year that ratio has

been increased to about 98%. Total provisions decreased to Rs. 7.9billion

which was previously Rs. 9.2 billion in 2007, largely on account of charge

44
Annual financial Report, (2008) Publish by Zarai Taraqiati Bank Limited, December
31, 2008, p. 15
45
Ibid
18
off to the tune of Rs. 3.3 billion during Financial Year 2008, Total gross

Net Profit Losses declined to Rs 13b (FY07: Rs.16.7b) with gross

infection of 16.7% (FY07: 23.7%) on books Accounting for provisions, on

net infection decreased to 7.4% (FY07: 12.2%). Around 28% of Net

Profit Losses are off the record in the loss category. 46

The following table shows the regulatory classification of Net Profit

Losses category wise for last two financial years.

0 Categories Rs. Millions FY. 07 FY.08

1 Other Assets Especially 5254 6039

Mentioned

2 Substandard 2916 1614

3 Doubtful 3820 3666

4 Total 11990 11319

This table shows the Net Profit Loss of assets for the two financial years

2007 to 2008. The trend in increase or decrease in the amount of assets

being held my Zarai Taraqiati Bank during this period can be seen by

drawing a graphical presentation.47

46
Annual Financial Report 2007, Published by Zarai Taraqiati Bank Limited, December
31,2007, p. 05-07
47
Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited,
December 31, 2008, p. 24-30
18
FY= Financial Year

This graph depicted that decreasing trend in net profit loss of assets in two

year, there were some incomplete values of these assets had been printed

in the annual financial statement of year 2009, however the trend of given

data was clearly indicating the downward shift in net profit losses, which

appears to be the progressing sign as for as the performance of Zarai

Taraqiati Bank is concerned.

For the purpose of measuring the performance while considering the

Liquidity Ratios48which is a class of financial metrics that is used to

determine a company's ability to pay off its short-terms debts

obligations. Generally, if you higher the value of the ratio, the larger the

margin of safety available that the company possesses to cover short-term

debts.49

48
Lawrence J. Gitman (2006), Liquidity Ratios, Principals of Managerial Finance,
(11thed.), Pearson Education, United States of America, p. 43
49
Lawrence J. Gitman (2006) Liquidity Ratios, Principals of Managerial Finance,
(11thed.), Pearson Education, United States of America, p. 43
18
Of the total lending book, 7.8% of loans (on net basis) have been financed

through deposits amounting to Rs. 5.4 billion, against a target of Rs. 7

billion in Financial Year 2008. Deposit base largely comprises of current

assets while a nominal proportion remains in term deposits.50

Deposits Information FY. 07 FY. 08

Rs. In Billions

1 Fixed Deposits 0.29 0.11

2 Current & Saving 5.1 4.2

Deposits

3 Others 0.05 0.03

4 Total Deposits 5.4 4.3

The following table depicts the deposit composition of the bank. To

further understand the change in deposits a graph can be drawn.

Over the years, the bank’s main source of funding has been debt from

State Bank of Pakistan (SBP). Zarai Taraqiati Bank Limited obtained

loans from State Bank of Pakistan for providing finance to customers for
50
Warren Reev Fess (2008), Accounting, 21th ed., p. 392
18
agriculture purposes. Of those, three credit lines amounting to Rs. 1.6

billion carry interest rate of 4% per annum while remaining thirty two

credit lines amounting to Rs. 49.7 billion are based on profit and loss

sharing subject to maximum share of profit to State Bank of Pakistan

ranging from 4% to 10% per annum. These loans are secured by way of

guarantee of Government of Pakistan. Furthermore, SBP’s equity holding

of Rs. 3.2 billion was converted into subordinated loan on terms to be

agreed with SBP. Total borrowing (including subordinated debt) from

SBP amounted to Rs. 54.5 billion in Financial Year 2008.51

Since 2003, ZTBL has not been able to pay installments to State Bank of

Pakistan on account of financial constraints. In the year 2003, the bank has

submitted a proposal to the State Bank of Pakistan regarding restructuring

of debt. According to the proposal, the debt will be repayable in 15 equal

semi-annual installments with a provision to make repayment of the

subordinated debt in the last installment. The markup will be pegged to

weighted average yield of 12 months Treasury bill rate of 2.4% per annum

as per Treasury bill auction dated June 12, 2003 and capped at the

aforesaid markup rate for an initial period of five years.52

Profitability Ratios, used to assess a business's ability to generate earnings

as compared to its expenses and other relevant costs incurred during a

specific period of time. For most of these ratios, having a higher value
51
Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited,
December 31, 2008, p. 30
52
President Zaka Ashraf addressing the Zarai Taraqiati Bank’s Employees, Annual
conference, Minutes of Meetings 2008, June 30,2008, p.01-02
18
relative to a competitor's ratio or the same ratio from a previous period is

indicative that the company is doing well.53

ZTBL is a specialized bank facilitating the agriculture sector in Pakistan

by providing agricultural loans to farmers at subsidized rates. However, by

doing so, the financial viability of the bank gets compromised as ZTBL is

required to lend at a rate of 8% that is lower than the previous rates of

around 14% per annum. With an adequate growth in advances portfolio,

net markup income increased to Rs. 5 billion (FY07: Rs. 3.6b). Markup

income largely emanated from the advances portfolio comprising 75.8%

of the total.54

Resultantly, spreads increased by 70 basis points to 3.5% (FY07: 2.8%).

The bank’s focus on special assets has yielded positive impact on total

revenues as recoveries on SAM loans amounted to Rs. 4.8b (FY07:

Rs.5.1b) in FY08. With nominal contribution from dividend and fee

income, total revenues (net of interest expense & defined benefit plan)

stood at Rs. 10.4b (FY07: Rs. 9.2b). On account of declining fresh NPLs,

provisioning requirement was subsequently reduced during the year. An

additional provisioning of Rs. 1.9b was set aside in FY08 against Rs. 3.1b

last year, thereby reducing the profit by the same amount in FY08.55

53
Lawrence J. Gitman (2006) Liquidity Ratios, Principals of Managerial Finance,
(11thed.), Pearson Education, United States of America, p. 50
54
Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited,
December 31, 2008, p. 35
55
Annual Financial Statement 2008, Published by Zarai Taraqiati Bank Limited,
December 31, 2008, p. 35
18
Considering the size of the bank, its overheads have always remained on

the higher side. While head count (including permanent) decreased to

5,286 (FY07: 5,333) in FY08, there was a significant increase in

administrative expenses to Rs. 4.5b (FY07: Rs. 3.8b) largely on account of

raise in salaries. Overhead and efficiency ratios stood at 4.6% (FY07:

4.2%) and 43.4% (FY07: 41.3%), respectively. Net profit amounted to Rs.

2.6b (FY07: Rs. 1b). Improvement in profitability can largely be

attributed to reduction in provisioning as compared to the previous year.

Going forward, containing Net Profit Losses improving on overheads will

play a pivotal role in determining adequate profitability levels.56

The number of amounts and types of long term financing used by a firm is

called capitalization Types of financing include common stock, preferred

stock, retained earnings and long term debt. A firm with capitalization

including little or no long term debt is considered to be financed very

conservatively. This is also called as cap, capital structure total

capitalization 57

The total value of all outstanding shares of a publicly traded company is

called capitalization. This can be calculated by the price per share.

Capitalization is one of the basic measures of a publicly traded company.

56
Ibid
57
Lawrence J. Gitman (2006) Capital Structure, Principals of Managerial Finance,
(11thed.), Pearson Education, United States of America, p. 475
18
Generally speaking, a higher capitalization indicates a more valuable

company.58

To measure the performance of Zarai Taraqiati Bank by considering the

capitalization vital subject, this study analysis their financial statement.

The paid capital increased to Rs. 12.5billion (FY07: Rs. 11.9b) on account

of bonus share issue. Accounting for retained earnings, net worth of the

bank has increased to Rs. 17.4b (FY07: Rs. 15b). While the risk weighted

assets increased at the same pace as equity, Capital Adequacy Ratio

(CAR) remained around prior year level of 24.1% (FY07: 24.5%). Over

the years, the high proportion of NPLs has been a drag on ZTBL’s equity.

However, there was a significant improvement this year when NPLs as a

proportion of their equity decreased to 30.7% previously which was 52.5%

during the financial year 2007.59

This is an indicator of profitability which is determined by dividing net

income for the past 12 months by the total average assets. An indicator of

how profitable a company is relative to its total assets. 60

Return on Asset provides an idea of how efficient management is at using

its assets to generate earnings. It is calculated, as shown here, by dividing

a company's annual earnings by its total assets, with ROA displayed as a

percentage. Sometimes this is referred to as return on investment. The

58
David L.Scott (2003), A & Z Guide to Investment term for Today Investor, London,
Houghton Miffin Company.
59
Aamir Shafique & Maimoon Rasheed Annual Financial Report 2009, VISC Credit
Rating Company Limited, June 30, 2009, p.07
60
Lawrence J. Gitman (2006) Profitability Ratios, Principals of Managerial Finance,
(11thed.), Pearson Education, United States of America, p. 50
18
assets of the company are comprised of debt and equity, since both of

these types of financing are used to fund the operations of the company.

The higher ROA number the better as it indicates that the company is

earning more money with less investment.

Return on Assets= Net Income/ Total Assets

Increase in value this year over the last year divided by value of assets last

year. This is also called as rate of increase in asset value.

Financial assets of Zarai Taraqiati Bank have shown the considerably high

growth over the last three financial years which are under discussion in

this study analysis. Data to prove this statement will be discussed in

following financial measure.61

The assets of the company are comprised of debt and equity, since both of

these types of financing are used to fund the operations of the company.

The higher Return on Asset numbers the better as it indicates that the

company is earning more money with less investment. A firm's total assets

minus its total liabilities are known as shareholder’s equity. Equivalently,

it is share capital plus retained earnings minus treasury shares.

Shareholders' equity represents the amount by which a company is

financed through common and preferred shares. This equity can be

calculated by using the following formulas.62

61
Annual Financial Statements (2009), Published by Zarai Taraqiati Bank Limited,
December 31, 2009, p. 25
62
Lawrence J. Gitman (2006) Shareholder’s Equity Ratio, Principals of Managerial
Finance, (11thed.), Pearson Education, United States of America, p. 43
18
Shareholder’s Equity= Total Assets - Total Liabilities

0 Categories in FY. 2007 FY. 2008 FY. 2009

Rs.

1 Total Assets 93,402,47 97,474,86 102,400,750

6 3

2 Total Liabilities 78,434,80 81,475,20 83,375,200

5 4

3 Shareholder's 14,967,67 15,999,65 19,025,550

Equity 1 9

The date for above table has been taken from last three financial year’s

annual reports for the purpose of measuring the shareholder’s equity over

the years.

Result of this table can be illustrated by graphical presentation of the data.

This shows the increasing trend in shareholder’s equity over the years.

Liability is an account payable which is writes off by arranging new loan.

You cannot just decrease an asset and increase a liability without affecting
18
equity since Assets = Liabilities + Equity. And since you want to find a

situation where liabilities increase and assets decrease, you will need to

decrease equity by the absolute value of both changes (i.e. -6 + 5 = 11).

So, if Assets decrease by 5 and Liabilities increase by 6, then equity needs

to decrease by 11 to keep the equation in equilibrium. Essentially this

means that the journal entry will require some type of expense that is only

partially paid.63

Zarai Taraqiati Bank limited is basically an agro financing bank which has

started performing many additional commercial banking functions, its

ability to perform many multiple banking function make it more vital for

Economic Development of Pakistan. Moreover, amongst all economic

sectors, the contribution of Agricultural sector towards the gross domestic

product (GDP) of Pakistan is pre-dominant. All most all banks are

providing agriculture loans but their lowest interest rate which is about 8%

makes it standout of all the financial institutions. Pakistan being a agro

based economy highly depend on the agriculture development, to bring in

this progress you need to have a strong agriculture banking sector. Zarai

Taraqiati Bank has been fulfilling this need from birth of our country.

Although a lot of effort is still required to improve its function.64

63
Lawrence J. Gitman (2006) Liquidity Ratios, Principals of Managerial Finance,
(11thed.), Pearson Education, United States of America, p. 475
64
Interview with, Chaudhary Bashir Ahmed, Zonal Chief, Jhang, May 7, 2010
18
 Conclusion

Healthy and functioning rural finance markets are directly related to

achieving the two key national policy objectives of accelerating rural or

agriculture growth and reducing poverty nationwide. The understanding of

these objectives depends on the simultaneity of developments in rural

finance and non-financial markets to promote the creation of diverse

sources of rural finance to build sustainable financial institutions, and

arouse products and capital flows in the rural sector.

For this, rural finance must be seen as an integral part of reasonable

development within a framework of macroeconomic stability. The

enduring corporatize restructuring leaves the basis for fundamental

reforms for rural finance market development. The frequent financial

drain, pursuing the old rural finance model and the narrowing fiscal space

have also promoted a shift in Government strategy that now seeks viable

intermediaries for enhancing outreach.

For the majority, access to affordable rural finance services is also

important to enable them to compete in the post-World Trade

Organization scenario. Inability to compete because of high financial costs

could reduce income of the majority of farmers and rural clients,

particularly the small and subsistence clients. Due to lack of access to

affordable rural finance services will also prevent the clients from
18
switching to non-farm activities. All these effort are made to reform the

Zarai Taraqiati Bank as an affordable Rural Financial Institution for

progress of rural population and enhancing their trust on banking.

Zarai Taraqiati Bank Limited has made substantial progress in advancing

the Information Technology (IT) system available in every part of country.

They have installed modern communication network protocol for efficient

emails and circular management system. Previously, all branches were

using the manual handling of deposits which has been converted in proper

I.T based Deposit Management System to facilitate their customers. Most

importantly, this mandatory advancement in Information Technology

system would be helpful in making the transparent banking system.

Encouraging element in the progress of Zarai Taraqiati Bank Limited is

consistent decrease in Credit Risk over the years starting from 2007 till

now. There has been a significant decrease in provisions and net profit

loss starting from the financial year 2008. Zarai Taraqiati Bank had

targeted to serve 600,000 (clientele) during the financial year 2009, which

has been achieved with remarkable effort only in half year.

As the amount of deposits depicted the decreasing trend in financial year

2008 with respect to previous year but the things changed so dramatically

that Zarai Taraqiati Bank accomplished its deposit target with in the year.

This indicates the strong financial position of the bank, being able to

convert their assets into rapid cash. Role of State Bank of Pakistan is vital
18
in pulling off their goals for any Financial Institution as it is for Zarai

Taraqiat Bank of Pakistan. With adequate growth in advances portfolio

their markup income has increased.

Overall, the return on equity is increasing which means that company is

getting more profit by investing less. Moreover, the increase in assets also

predicts the growth and ultimately leads to higher performance as a

financial entity with handsome amount of profit over the years.

This study is a preliminary investigation about performance assessment of

commercial banking of Zarai Taraqiati Bank Limited in Pakistan through

annual financial report’s analysis, during the on-going process of

modification in functional changes in a view to increase the profitability of

assets and other services. The variables used as inputs and outputs give us

some insight about dynamics of commercial banking in Pakistan.

Although, these cannot be considered as universally accepted measures of

bank performance but their inclusion merits with theoretical strands and

existing literature on commercial banking. The study calls for the

improvement in working of Zarai Taraqiati Bank of Pakistan through

combined efforts of banking sector and the government to be at par with

the best world practice.

Recommendations
18
During this study analysis in most of the cases performance seems to be

improving on daily bases, however, they needed to improve more in

achieving the organizational goals by every means. This thorough study of

Zarai Taraqiati Bank recommended few suggestions, especially in contrast

to their management system.

First of all, the employees of Zarai Taraqiati Bank Limited needed to have

effective performance management training. Employee is the life blood of

the organization and also very important asset itself for the company. To

utilize other assets of the company more efficiently and resourcefully the

employee as asset should be recognized

Their Human Resource Management department has to take brave steps in

order to bring history making development in banking sector. They need a

highly motivated workface to cope with day to day changes and

advancement in every work field like in information technology,

developing a realistic and objective performance management program,

and be the first one to avail the opportunity on the ground of their

professional skills they possessed.

As it has been uttered again and again that employees are the most

valuable assets for any company, therefore Zarai Taraqiati Bank should

took substantial initiatives to stop the political interventions in job hiring.

This study recommended optimistic approach toward achieving the

18
organizational goals for the worthwhile progress and continues

improvement is also necessary in attaining the ultimate success.

18