On 29 December 2003 when AKFED (Aga Khan Fund for Economic Developmet) acquired HBL (Habib Bank Limited), AKFED had only PKR 90 billion ($ 1.5 billion) in assets. An organization worth $1.5 billion buying a bank worth $9.5 billion for just $389 million is the largest corruption scandal in Pakistan’s history.
The Aga Khan Fund for Economic Development (AKFED) acquired Pakistan’s second largest bank worth PKR 570 billion for a measly PKR 22.5 billion – benefiting as much as PKR 548 billion from the transaction. This is a staggering 30% of Pakistan’s fiscal budget, and this amount could have funded 8 more motorways like the Lahore-Rawalpindi motorway, equipped every government-funded hospital in the country with vital lifesaving equipment, funded hundreds of government schools, and helped with numerous other poverty alleviation projects. However the ones involved in this transaction ignored every benefit that the residents of Pakistan could have received, and chose to benefit themselves.
HBL started in Bombay with a mere PKR 25,000. In 1945 it reached Karachi and after Pakistan was formed, the bank’s head office moved to Karachi and is still here. It maintained it customer base even after 1974 privatization. In the privatization drive of the 1990s HBL could not survive
Established in 1947, HBL is considered Pakistan’s second largest commercial bank. It has 1425 branches in Pakistan, and has 48 more branches in 26 other countries including US, Middle East, Far East, Britian, Switzerland, Holland and other European and African locations. Among these 1425 local branches, there were 1408 retail and 17 corporate branches. At the time of it’s sale HBL had 20% share of the national banking market. Three more institutions owned by HBL were also functioning in the trade sector:
- Habib Bank Financial Services (Private) Limited (Karachi)
- Habib Finance International Limited (Hong Kong)
- Habib Finance Australia Limited (Sydney)
HBL also had joint ventures – one was Habib Nigeria Bank Limited with a 40% share and the other was Himalayan Bank Limited with a 20% share. Habib Allied International Bank PLC has 90.5% holding of HBL. Moreover, HBL was the only Pakistani bank to have offices in Iran and Egypt.
The first plan to sell HBL was under prime minister Nawaz Sharif under the privatization program. At that time a Canadian group had placed a bid to buy HBL for PKR 60 billion ($1.2 billion dollars at that time), but Nawaz Sharif government declined that offer citing that the offer was too low for such a large bank. At that time, when the plan to sell HBL came up, the bank was restructured and overhauled, due to which all of it’s 48 overseas branches became profitable.
It is worth mentioning that overseas banking licenses are extremely difficult to obtain, as millions of dollars in licensing fee has to be paid to foreign governments where the banking license is required. Banking experts were shocked that for a mere $382 million, not only did Aga Khan buy off a prominent institution like HBL, but expanded the footprint of AKFED in 48 countries, and obtained influence over Pakistan’s entire economy by controlling one of the largest banking entities in Pakistan.
The process of privatization of HBL started in Nawaz Sharif’s but concluded when Shaukat Aziz – a banker by profession – was appointed Prime Minister in Parvez Musharaff’s regime. The swiftness with which the deal was completed left all economic experts in a state of shock. This happened in December 2003 with the entire bidding process concluding in no more than 10 minutes. The Secretary of Privatization Commission announced that 2 parties have put forward unconditional sealed bids for the acquisition of HBL, and that whichever offer is in line with the price ascertained by the government, will be announced as the successful bidder.
When the Privatization Minister Dr. Hafeez Shaikh and Secretary Privatization Ahmad Waqar were asked about the reserve price set for the sale of HBL, they said: “We need not announce the reserve price as the bidder has met the conditions we placed for bidding.” Not making the reserve price public, was enough proof that some events and transactions behind the scenes were taking place which were shaping the final outcome of HBL’s privatization.
Importantly, the federal government had allocated PKR 17 in two installments of PKR 9.7 billion and then PKR 8 billion from the national budget to HBL. Moreover, PKR 4.8 billion were spent against voluntary separation scheme. A week before selling HBL, bad debts worth PKR 9 billion were moved from HBL to Corporate and Industrial Restructuring Corporation (CIRC), which brings the total to PKR 31.5 billion which were spent on the bank before it’s sale to AKDN. The bank’s remainder assets after incurring these costs were sold for a mere 382 million dollars (PKR 22.409 billion) to AKFED.
According to the terms of bidding, complete control of the bank would be given to AKFED after payment for 26% shares, whereas the payment of 25% of shares would be done in the next two years in two equal installments. However, this term was also increased to three years without any justification to give room to AKFED to pay the remainder of the purchase price from HBL’s own profits rather than from it’s own funds as AKFED itself was a very small organization. The bank earned a profit of PKR 19 billion in 2006-07 on top of the profit of PKR 16 billion it earned in the previous two years. Therefore, after privatization, the bank earned PKR 35 billion. therefore, the remaining price of 25% shares with AKFED had to pay from its own funds, were now paid from HBL’s own profits by gaining an extension in the payment period.
On 26 February 2004, complete control for HBL was handed over to AKFED and the bank started off on a journey of handsome profits after the restructuring efforts, voluntary separation scheme and due to getting rid of the bad debts.
This is how AKFED acquired one of the largest banks of Pakistan having 1450 internal and 55 external branches, for a mere PKR 22.4 billion whereas according to the book value as of February 26, 2004 only the internal assets of HBL were worth PKR 46 billion and the profits for the bank between 2000 and 2004 was PKR 20 billion. As if this was not enough, the Government of Pakistan paid back a further amount to HBL under Income Tax Rebate of PKR 9 billion. The Government also provided PKR 8 billion for downsizing of the bank. Therefore, the bank actually cost AKFED only PKR 6 billion.
Another aspect is that many assets of the bank included in it’s book value of PKR 46 billion were carried at a book value of PKR 1 in the balance sheet of HBL due arriving at the theoretical end of their economic useful life, but these assets are often revalued. For example, the regional headquarters of the bank in Quetta on Gulistan Road on a land of 15 acres. building owned by the bank on Upper Mall Road in Lahore opposite Atchison College, and the Habib Bank Tower in Islamabad on Jinnah Avenue are not carried at their market value in HBL accounts, but the real market value of just the Habib Bank Tower in Islamabad was PKR 26 billion. The bank was sold to AKFED for just PKR 65 per share whereas the stock market value at that time was PKR 235 per share.
All in all, the total value of the assets owned by HBL inside Pakistan were in excess of PKR 200 billion whereas the investments of HBL in other institutions was PKR 126 billion. When privatization of HBL completed on April 26, 2004, the total value of HBL assets outside Pakistan was PKR 18 billion, whereas investments outside Pakistan were in excess of USD 8 million. After privatization, the new management terminated 20,000 employees and on the other hand top 8 executives of the bank were handed memberships of different local and international clubs worth PKR 1 million per membership. The President of the bank and 5 other executives were now given their salaries in US Dollars and the Chairman was now being given a performance bonus of PKR 10 million. Other second tier executives were given performance bonuses between PKR 1 million to PKR 6 million.
While on one hand 20,000 employees of the bank were terminated, some notable people were hired on handsome salaries. This included Zafar Usmani (brother of General Usmani), Saira Khan (wife of an ex-Colonel), Jameel Ahmad Khan (a friend of Umar Ayub).
Post-acquisition, a further 5,600 were terminated under a golden handshake scheme. In 2004 the bank had 19,000 employees, and now there are only 13,400 employees. However, in 1997 the bank employed 32,000 employees.
The project for handing HBL to AKDN under the guise of privatization had kick-started back when Shaukat Aziz was Finance Minister. He influenced the appointment of Zakir Mehmood – also an ex-employee of Citigroup like Shaukat Aziz – as Chairman of HBL who between 2000 and 2003 went on a spree of downsizing the bank under different termination schemes. He was paid a monthly salary of PKR 1.8 million back in 2000. He terminated 7,000 employees under 2 golden handshake schemes. After privatization, another 15,000 employees were terminated, and in 2005, HBL terminated 2,300 more employees overnight.
For upper management, it was a different story. Three hundred executives of the bank were sent to Dubai for ‘recreation’ from 11-13 August 2006, where they stayed in a 5-star hotel and were served alcoholic beverages while watching cabaret dances. The bank spent PKR 80 million on this recreation trip.
While the government of Pakistan lost PKR 548 billion due to HBL’s privatization, the non-executive staff of HBL did not benefit from the privatization transaction at all. For many years after privatization, the salaries of lower staff were frozen for years to come.
Before privatization, the banks’ net annual profit was PKR 12 billion which increased to PKR 15 billion even though 600 branches had been closed down in the name of privatization. During this time, the bank paid PKR 8 billion for acquiring a core banking software solution whose market value was just PKR 2 billion. This software had already been rejected by numerous banks in Pakistan and India.
Abdul Qayyum Afridi of Habib Bank Progressive Officers’ Association said that kickbacks and commissions worth PKR 10 billion were paid by AKFED to Shaukat Aziz, Dr. Salman Shah and Zakir Mehmood for selling 51% shares of a bank with assets worth 264 billion, domestic investments worth PKR 126 billion and international investments worth USD 8 million for a mere PKR 22.4 billion. Afridi also added that the stock market crash of 2006 and 2007 was orchestrated to conceal the corruption of Shaukat Aziz and his associates.
HBL also froze the pensions of retired personnel with effect from 2005 and never paid off pensions. For many years, The Habib Bank Progressive Officers’ Association has been urging the Chief Justice to look into corruption of the entire privatization process.
As a comparison, United Bank Limited (UBL) which was established in 1991 and had only 65 branches, had 80.86% of its shares acquired by Standard Chartered Bank for a staggering USD 413 million. Due to increase in the price of it’s remaining 19.14% shares, the price of it’s 100% shares increased to USD 511 million. If a small bank like UBL was worth USD 511 million then how much should have HBL been worth?
A lot of hue and cry was raised on this mega corruption scandal in the news and print media, but nobody wanted to listen. It seemed like the ones responsible for investigating this corruption were somehow involved in the corruption.
Even Senator Ishaq Dar declared the privatization of HBL as ‘suspicious’ and as a loss-worthy venture for Pakistan and said that the 51% shares should been sold for at least USD 600 million. His voice too, went unheard and no action was taken.
Tasleem Shaukat Khan – a resident of Lahore – filed a constitutional petition in Supreme Court of Pakistan and challenged the privatization of HBL. He argued that the entire process of privatization of HBL is based on misconduct and fraud. Even during the tenure of the previous government, a Canadian group had offered PKR 60 billion which was refused. The petition also mentioned the funds injected into HBL before privatization and the PKR 22.5 billion spent on golden Handshake, and requested for a stay order. The Supreme Court refused a stay order but accepted the petition for hearing. The petition is still being heard in the Supreme Court.
According to banking experts, the privatization of HBL cost hundreds of billions to the economy of Pakistan. The exact amount of benefits reaped by General (Retd.) Parvez Musharaf, Shaukat Aziz their associates are still unknown to this date.