Assignment # 1 Case Study: KASB Bank Limited: Capital Shortage

Assignment # 1
Case Study
KASB Bank Limited: Capital Shortage
Student Name: Waqar Mansoor (62790)

Course Name: SFAD
Term: Fall 2020
Instructor: Dr. Arsalan Hashmi
1. Why was the moratorium placed on the KASB Bank by the State Bank of
Pakistan? Determine the Tier I capital shortage for the years 2012 and 2013
assuming there was no reduction required as per Exhibit 5.
For five-year KASB Bank had reported losses continuously. its losses for the
calendar year ending 31 December 2013 were PKR1,625 million. It has a very
high percentage of its loans and investments portfolio were nonperforming. As
a result, the bank had been facing severe capital shortages in terms of both
minimum capital requirement (MCR) and capital adequacy ratio (CAR).
As of 30 September 2014, its MCR was about PKR0.958 billion, with a CAR of
negative 4.63 per cent against the required levels of PKR10 billion and 10 per
cent, respectively. As KASB Bank could not meet the SBP capital adequacy
requirements, hence regulatory action by the SBP.
Initially SBP warned the bank’s board of directors that as the regulatory capital
had become negative, the SBP would take action if arrangements were not
made to enhance the capital base. But even after several warnings has been
given to meet the regulatory requirements, KSAB bank could not meet the
basis requirements.
State bank of Pakistan finally impose moratorium period of 6 month. During

this period KSAB bank can not pay debt while it can receive payment of loan
and others amounts.
There is net shortage of Tier 1 capital in 2012 and 2013 is 8.4 billion PKR and
10.84 billion PKR respectively.
2. What methods were adopted by KASB Bank management to resolve the

shortage of capital?
Mergers
A series of mergers with other group companies has been decided by the
management and board of directors to meet the State Bank requirement of
capital. Three companies were merged into the bank. International Housing
Finance Limited (IHFL) were merged in 2006, and KASB Capital Limited (KCL), in
2008, which were non-banking finance companies. Network Leasing Company
Limited (NLCL) was merged in 2008.
Issue of Rights Shares:
To increase the capital KASB bank issued rights share one billion shares at a
discounted price of PKR 3 per share. That has increased the paid-up capital
from PKR9,509 to PKR12,509 million (net of discount) as of 31 December 2011.
Capital Investment by Asia International Financial Limited
In 2010, restructuring proposal given to Chinese company M/s Asia

International Financial Limited (AIFL) has been given 50 per cent shareholding
against injection of funds in the group holding company KASB Finance Private
imited. But in 2014, SBP objected the changed in ownership structure is
without permission.
Management Initiatives and branch banking
Management has taken various measures to improve performance and

probability. They started monitoring of service quality to the customers. To
increase employee’s moral, training and development, Recognizing and
rewarding people has been started. Improving corporate communication by
introducing new globally recognized banking software. And Reengineering
processes to enhance efficiency.
3. What plan was prepared by the Board of Directors (BOD) to deal with the
situation and what is your opinion of this plan?
After several mergers with non-banking financing companies, KASB was in

difficulty to manage business of scope. They loss focus from holding company
and subsidiary and child companies are not performing well.
Reshaping and recapitalizing plan was prepared to address the capital

deficiency and financial condition. Reshaping the bank through a demerger
process by separating core banking assets from the noncore businesses and
assets. Re-capitalizing the demerged core by either direct equity injection or
amalgamation with another bank.
KASB plan was good but time and circumstances are not with KASB bank. First
reshaping the business was necessary to control and manage core business.
Initially other non-core business increases the capital requirement but after
that these businesses not only loss in business banking scope but also reported
huge losses and hence impacted on KASB bank.
Second step of their plan to recapitalize through direct injection or

amalgamation. But here also time was bad. They could not implement their
plan timely and SBP has did the same plan by merger of bank Islamic. Mergers
and direct injections are the only ways to retain KASB bank.
4. Analyze the conditions prevailing during 2009 to 2014 that affected the
small bank such as KASB Bank.
The banking industry in Pakistan had grown at a compound annual growth rate
(CAGR) of 13.2 per cent over the period 2009–2014. But Minimum capital
requirement has been increasing continuously by SBP during 2008 to 2014. It
was 5 billion PKR in 2008 and continuously increased one billion each year and
in 2013 it was reached up to 10 billion PKR. This was happened to safeguard of
depositor but it become difficult to raise capital by small bank like KASB.
As Basel III was being implemented, the pressure on asset quality and a
narrowing of spreads made the operating environment for banks having a
weak financial risk profile more challenging. Asset quality has to be reviewed
quarterly and this was the compliance by SBP. Bank has to be reviewed entire
loan portfolio.
On one side they need to increase capital to meet regulatory requirement and
on other hand they need to manage current and enhanced business. That thing
become real challenging to provide return to shareholders.
5. Do you think the State Bank of Pakistan acted impartially in resolving the
KASB Bank situation and what is your opinion of the amalgamation of the
bank into Bank Islami?
Yes, State bank of Pakistan has done right decision of moratorium to take the
rights of depositors because even after various warnings regarding compulsory
requirements, KASB was continuously nonconformance. KASB has tried varies
means to meet the requirements but they failed.
moratorium restrained the bank from payment of certain obligations and debts
while it continued to receive all payments/recoveries due to the bank.
The SBP held discussions with Allied Bank Limited (ABL), Habib Bank Limited
(HBL), Bank AL Habib, Saudi American Bank (SAMBA) and National Bank of
Pakistan (NBP), regarding merger or takeover of KASB Bank Limited. But none
of them showed any interest and did not formally approach the SBP. After that
SBP added that four other banks, that is, JS Bank, Sindh Bank, Askari Bank and
Bank Islami, had shown interest in the possible acquisition of KASB Bank.
To protect the lifelong savings of depositors, to protect the jobs of employees,

as well as to ensure the stability of the financial system as a whole,
amalgamation of KASB Bank with and into Bank Islami Pakistan Limited was
was an good solution. No big bank is in interested in KASB only small banks are
interested. Bank islami is also in difficult time and after merger with KASB both
banks are become strong hence stability of financial system is maintained.
Other option is to close KASB bank but it cost of employment, and hurt the
trust on banking systems of the nation. So Decision by SBP was right.

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Assignment # 1

Student Name: Waqar Mansoor (62790)

State bank of Pakistan finally impose moratorium period of 6 month. During

2. What methods were adopted by KASB Bank management to resolve the

Capital Investment by Asia International Financial Limited

In 2010, restructuring proposal given to Chinese company M/s Asia

Management Initiatives and branch banking

Management has taken various measures to improve performance and

After several mergers with non-banking financing companies, KASB was in

Reshaping and recapitalizing plan was prepared to address the capital

Second step of their plan to recapitalize through direct injection or

To protect the lifelong savings of depositors, to protect the jobs of employees,

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