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A leading authority on risk management Arif Usmani was based in Hong Kong during the East Asian financial crisis which proved to be an invaluable learning experience. Between 1989 and 1994, Arif Usmani was on secondment with SAMBA in Riyadh as Division Head where he managed some of the largest borrowing relationships in the region. Arif Usmani gained particular renown after his posting as Citibank country head in Slovakia where he brought about a sea change in the banking culture by introducing a customer-oriented approach to banking.
With a wealth of international banking experience spanning almost 30 years at Citibank, Citi Country Officer and Managing Director, Arif Usmani discusses the current challenges facing the banking sector as well as Citibank’s plans for the future.
You have been with Citibank since the 1980s, can you tell us about your experience with Citibank?
Arif Usmani: “I joined the bank in 1981 in Karachi. I have a theoretical physics academic background – not a business degree so it was somewhat of a surprise to me when I got selected as a Management Trainee. After spending seven and a half years here, I worked for almost four years in Saudi Arabia with Citi. I then moved to Singapore for two years and then worked in Hong Kong for four years followed by Slovakia for almost two years. I also worked in Nigeria for two years and then retuned to Saudi Arabia for a second stint of four and a half years. Basically, 6 different assignments linked by Citi’s common culture allow one to transfer between geographies and deliver effectively.
During my last assignment in Saudi Arabia, Citi sold its interests there so theoretically I left Citi but I was on secondment and had an informal understanding whereby if Citi had an appropriate slot they would consider me for it. I wanted to return to Pakistan for personal reasons, so my ‘condition’ for returning to Citi was to be able to work in Pakistan. When the position here became available, I came back to Pakistan in early 2008. My predecessor Mr. Zubyr Soomro retired in March 2008 and since then I have been responsible for Citibank in Pakistan.”
You have gained renown for your experience in risk management, how did this come about?
AU: “I have spent more than half my time at Citibank working in risk management and approving risk for the bank in different markets so I do consider risk assessment as a core skill - specializing in emerging markets.
I was in Hong Kong during the Asian financial crisis in 1996 and ‘97 which was probably my greatest learning experience. One of the things that went wrong in Asia from a banking talent perspective was that many bankers had grown up and seen a high-growth environment only and were inexperienced in dealing with a downturn. If you spoke to a banking relationship manager at that time and asked him to make a conservative assessment of the businesses he was responsible for, the conservative estimate would still mean at least 10% sales growth. They had never experienced a recession. So it was a real eye-opener for them. That is the time when you really learn as an institution and obviously it exposes banks to kinds of things that they have never seen.
Crises also test management abilities and character. For example, customers in the same industry and line of business manage crises differently and we have many examples from the Asian crisis where this was displayed.
When banks manage such situations, they need to work with their customers to find solutions and not seek necessarily to damage their client’s business by over-reacting. Banks need to see a business’s sponsors committed to the problem - if you are a business owner and while your company is in trouble, you are holidaying in Switzerland and your bankers cannot contact you, it’s likely that the lenders will take decisions which could hurt the business. On the other hand, if your business is in trouble but you as an owner roll up your sleeves and work with your banks, banks are more likely to support you and see you through the crisis — that is what good banking is all about. We saw that happening in spades: people not engaged with their businesses had taken their money out and left it to the banks. However, there were others who were very involved and worked to save their name, reputation and businesses.
I was able to draw on some of my Saudi experience in this situation where we had witnessed this sort of customer behavior. At Citibank, a key element of our risk process is character assessment. Customer character forms an integral part of our analytics.”
What other steps do you believe are essential to ensure effective risk management?
AU: “There are many things. One of the fundamental issues we have faced at Citi globally has been the impact of concentration risk. The old proverb of not putting all your eggs in one basket came home in spades. JP Morgan and Citi were similar sized organizations from a capital perspective before the crisis broke in the US. We had roughly the same book value of equity. JP Morgan ‘lost’ $14 billion initially in subprime – we ‘lost’ more than $70 billion. This represented more than 60% of our capital while JP Morgan’s $14 billion loss represented around 12 % of their capital. Clearly a case of too many eggs in one basket!
To give you an example closer to home, Pakistani banks have been embroiled in the Dewan Group crisis. Dewan Group is a well-known corporate bankruptcy case in Pakistan with almost Rs 45-50 billion of overdue claims of banks. I believe one particular bank has more exposure to Dewan Group than its total capital. This is a failure of risk management. If you take franchise-threatening risk in any asset category, you have failed at risk management.
If I had to record one risk management lesson besides borrower character, it would be concentration: make sure that you take risk in your business that your business can sustain, in case that risk materializes - and things do go wrong. Portfolio management is therefore critical.”
Given the recent liquidity crunch, what are your views on the banking sector in Pakistan?
AU: “I think the banking environment in Pakistan has to be looked at on a historical basis. One recent example was the rapid growth of consumer lending. We saw unprecedented low interest rates here which banks wrongly extrapolated would continue ‘forever’. We at Citi decided to grow our Consumer lending business rapidly – too rapidly. In my view, banking is a difficult and ‘boring’ business: you use other people’s money and lend it out at spread which has to pay for your expenses and your expected costs of credit. Additionally, you must carry enough capital for the unexpected losses – something that we were reminded off by the recent crisis. Moreover, this capital has to be patient capital as banking needs to have long-term vision. You cannot rush the growth and we at Citi Pakistan rushed our consumer growth. We thought we could become the largest consumer banking business in a few years.
Citi launched a formal consumer banking business in Pakistan in 1992. From 1992 to 2004 we steadily progressed with decent return on invested capital. I remind our people about our results for the consumer business in 2004 and compare them to 2008. Something changed in the intervening years and our strategy should be to get back to achieving what we did in 2004. One critical element of those earlier results was what we call Revenue-Expense ratio. For every rupee we made, we spent 50 paisas. When consumer banking lost its way, for every rupee in revenue, our expenses were, 90 paisas! There is no point in spending Rs100 to make Rs110 because then you have no capacity to pay for cost of credit i.e. no capacity to absorb the cost of things going wrong. Minimum 2:1 ratio is gospel in Citi. So when interest rates went up, the revenue-expense margin didn’t allow banks to absorb the ensuing credit losses as customers stopped servicing their obligations. If you lose sight of the revenue-expense ratio, you can never build a sustainable business in any industry.”
Risk management has always been at the forefront of your mind, how would you describe your expertise?
AU: “Somebody recently asked me what is my core competency was and I think in one sentence it is: I think I can build good business in difficult markets and I define ‘good’ holistically - the character of the person, the nature of the business, and the sustainability of the activity. I can do that in difficult markets as that is where my experience has been. Emerging markets are always challenging - as I said earlier, the downturn in Asia was a great period of learning.”
What impact has the current economic downturn had on Pakistan’s banking sector?
AU: “I think the Pakistani banks have emerged stronger from the experience. They have realized that their consumer models have to change significantly. Corporate business models are mature and work just fine. The regulatory framework has helped - the State Bank of Pakistan. I have a lot of respect for the regulator.
Pakistan’s economy unfortunately remains very vulnerable to oil prices. This fragility scares me as a risk taking banker. We haven’t really turned the corner in terms of growing our exports to a level where we can take the next hike in oil prices on the chin and move on. For example, if oil prices increase beyond a certain level, it will be difficult for us. I know there is a significant increase in remittances and I hope that is sustained. The Government and the State Bank has made great effort in encouraging money from unofficial to official channels through the Pakistan Remittance Initiative. They have also taken stringent action against the money-changers engaged in unethical transactions. Stabilisation through the IMF programme has also happened. The one thing missing from the economic landscape which concerns me as a banker, is investment. The capital formation and the jobs of the future will come from this investment. That is not happening enough and not only for economic reasons but for political reasons. Capital wants safety so unless the security situation improves, it won’t happen.”
Citibank has won a number of accolades including Employer of Choice, what are your views on this?
AU: “Citi’s contributions to Pakistan’s banking industry have been amazing. Also, Citibank’s human resource talent is top of the line. I was at a senior government meeting of 25 bankers and 11 of those bankers were ex-Citi including the State Bank Governor and the Finance Minister. This has certainly been one of our major contributions. In fact this is the case in many countries. In the Philippines, the Central Bank Governor was from Citibank and several of the largest banks there were all run by Citi alumni. The exposure, the learning and the opportunities provided at Citi are incredible; despite the global economic downturn, we have continued to successfully export talent from Citi Pakistan to other Citi locations across the world.”
Given the recent volatility witnessed in Pakistan’s economy, what is your vision for the future of Citibank?
AU: “Citibank is going back to its roots. If you think about what Citigroup is doing globally, that is what Citibank Pakistan is doing as well. In 1998, Citigroup merged with Travellers and became a financial supermarket: doing everything for everybody at all times and everywhere. That model hasn’t really worked. We are sort of unbundling that merger and going back to our roots.
The first thing that comes to mind when you think of Citi is its globality: we are in over a 100 countries. No other bank even comes close. So globality is our key strength. We serve clients in markets that other banks cannot reach. Therefore, as we move forward, we will strengthen our global clients, global transactions, cross-border businesses etc.
Consumer, which became a big strategic move for the bank about 25 years ago, will continue, but in large global markets where it would make sense. To do consumer banking successfully, you require a continuum of stability e.g. you have products that require a customer relationship for 25 years - mortgages. In Pakistan this becomes quite difficult - it is difficult to build a consumer business model in volatile economies. Due to the changes in the market and our credit experience, we will have to modify and revisit our business model.. We are committed to the country. We have been here since 1961 and we intend to complete our 50th anniversary in January 2011. We saw the dismemberment of Pakistan in 1971 and didn’t leave, so the current crisis is just a walk in the park.”
Citi has been present in Pakistan since 1961 and will be completing its 50th anniversary in 2011. Citi has US$105MM invested in the country and employs approximately 847 permanent employees across Pakistan. Citi Pakistan has 18 fully operational retail branch outlets, with a focus on the main commercial centres of Karachi, Lahore, Islamabad, Faisalabad and Rawalpindi. Citi Pakistan’s business provides a variety of best-in-class products and services to more than 200,000 consumer and institutional clients. Citi is the leading bank in Pakistan for delivering export agency and multilateral financing and has been instrumental in the development of Pakistan‘s market for derivatives and other treasury products.
Citi Pakistan has also been at the forefront of the financial sector reform process in Pakistan and has been the lead bank in bringing the Pakistani Government to international capital markets. Over these years it has come to be reputed as an industry leader, recognized as the pioneer for a spectrum of banking products and services in Pakistan.
Some Citi ‘Firsts’ in Pakistan include:
• Pioneered Consumer Banking – first to launch Credit Cards, Auto Loans, Mortgages
• Derivatives (Interest Rate Swaps, Currency Swaps, Options)
• First 30-year US Dollar sovereign bond
• Issuance of the first foreign currency Islamic bonds or sukuks
• OPIC risk participation programs & structured ECA financings (volumes hit $1 billion or 20% of Citi global ECA business in ‘05)
• Bill processing for Public Sector utilities
• Customized remittance product for expatriates
• Back office processing (Private Label) for banks
• Providing the first equity offering in over a decade
• Creating the first 24/7 phone banking call centre
• Developing priority banking for branch banking customers
• Developing the first Urdu check book
CITI IN PAKISTAN: BUILDING COMMUNITIES
The Citi Foundation Marks a Decade of Support in Pakistan by Exceeding the US$1.5 Million Mark
As Citi Pakistan approaches its 50th anniversary in January 2011, the Citi Foundation, Citigroup’s social investment arm, marks a decade of support towards various socio-economic projects in the country, exceeding the total mark of US$1.5million in social sector support to Pakistan. Just this year, the Citi Foundation has provided US$400,000 through five new grants to Pakistan, for a spectrum of development related initiatives.
Citi’s main community objectives revolve around microfinance, financial education and environmental projects. Our efforts in the areas where we operate have benefits that extend beyond these cities as well. We are proud to have received the CSR National Excellence Award in 2007 and 2009 for outstanding corporate social responsibility. We were also one of the top ten companies to have received special recognition for our CSR efforts at the CSR Asia Forum in Manila in November 2009.
Citi Pakistan’s Grants:
Some of the grants Citi Pakistan has closely been involved with include:
• Citi Microentrepreneurship Awards (CMA): US$55,000 for the CMA that have been conducted in Pakistan since 2005, in collaboration with the Pakistan Poverty Alleviation Fund. The pivotal aim of the CMA is to support existing small enterprises and incentivize the creation of new ones.
• Citi Microfinance Network Strengthening Program: Additionally, Pakistan is one of nine countries included in the Citi Microfinance Network Strengthening Program (NSP), which is supported by a 3-year Citi Foundation grant (started in 2007). The Citi Foundation‘s global NSP initiative is intended to help expand microfinance outreach through resource development, advocacy and knowledge creation. In Pakistan, the NSP provides financial and volunteer skill-based support to the Pakistan Microfinance Network, which consists of organizations that are engaged in microfinance and dedicated to improving the outreach and sustainability of microfinance services in the country.
• Citi-LUMS Management Development Training for micro-finance institutions (MFIs): Grant worth US$65,000 to fund training modules for middle and upper MFI management in Pakistan
• Microfinance Research: A Citi Foundation grant to Acumen Fund supports research on the design of financial products for low income communities. Acumen Fund is a non-profit, global venture capital fund that addresses poverty by working to fill the niche left between traditional capital markets and grant-based philanthropy
• Development in Literacy (DIL): US$20,000 for a teacher training given to DIL for its supporting its schools in the Orangi town area in Karachi
• Thardeep Rural Development Program: US$22,000 for a micro-credit training program that will reach 2,000 women in Tharparkar, one of Pakistan’s most disadvantageous districts, in the province of Sindh
• Health: A Citi Foundation multi-year grant of US $280,000 was given to the Aga Khan Foundation to support its Urban Credit and Health Program, which endeavors to achieve sustainable improvements in health status among women of childbearing age and children in Karachi‘s underprivileged areas
Previously, grants have also been provided to the Lahore University of Management Sciences, Kashf Foundation, The Citizen’s Foundation, Institute of Business Administration, Institute of Business Management, Akhuwat Foundation, Tarraqi Foundation, Thardeep Rural Development Program and Development in Literacy over recent years.
Further, Citi Pakistan has played its part in supporting the Internally Displaced Person’s (IDP’s) by raising over $50,000 for this cause. Citi Pakistan’s employees’ donated one day’s salary on a voluntary basis for the IDP’s which was matched by Citi’s funds. Similarly during the 2005 Earthquake in the Northern Areas, Citi supported the construction of a girls school by The Citizen’s Foundation (TCF) in Mansehra. This year, the left over Earthquake Relief Funds have been donated to TCF for maintaining the operating costs of the Mansehra school campus for the next ten years. Additionally, the Citi Foundation provided a grant of US $1.9 million to the American Red Cross (ARC) National Headquarters for its Pakistan Earthquake Reconstruction Project, following the earthquake of 2005.