A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration, School of Management

Research Studies Project Report (M.B.A.) - Asian Institute of Technology, 2000

The freezing of FCAs can be termed a watershed event of the 1990s, at par with some of the most fundamental decisions taken in Pakistan's turbulent economic history (such as the nationalization drive in the1970s). Unfortunately for the government, FCA holders are unforgiving in their assessment that this policy action was the result of unwillingness on the part of the government (rather than its inability) to service its sovereign liability. Pakistan banking sector found itself in a crisis. The banks were heavily dependent on these FCAs, as considerable amount of the bank resources came from these accounts. In terms of immediate impacts on banks, most banks experienced a net flow of rupees as depositors started converting their Foreign Currency Accounts. However if these rupees are used to buy hard currency in the kerb market, the bulk of the remaining funds were likely to be channeled back to the banking system through new Rupee deposit schemes, except for the hard currency that is sent overseas. As these rupees are not going to be viewed as savings, they were more likely to be placed in demand or short term deposits. Thus, from the viewpoint of the banks and financial institutions in Pakistan it became crucial to attract deposits from people in order to 1route the funds back to the financial system. After a period was specified by which all FCAs must be converted in to local currency, the strategy of most of the Banks, including Foreign Banks, was to quickly devalue various Rupee schemes offered to FCA holders to convert there foreign exchange into rupee and emphasize on raising local currency deposits and try to maintain liquidity. Banks aggressively marketed Pak Rupee deposits. Banks offered Rupee deposits and investment products as alternative investment avenues. Lucrative products in Pak Rupee were offered to control liquidity and decrease risk factor and introduced incentive schemes for converted accounts i.e. high rate of interest on converted Pak Rupee accounts to keep the deposits intact with the Bank. Shrinkage of Bank's loan books through exit of marginal + import based clients Banks. The required funding was arranged from inter-bank market. Bank's also exerted upon clients to convert their accounts into special us dollar bonds (retention strategy). Aggressively market for fresh deposits and to retain converted funds and increased their lending rates to cover for increased cost of funds. A general trend observed is that under the irrational situation, in which the banks were operating the thing which has played an important role was not only the product design or the marketing campaign but other more important thing which seem to have played a vital role in the success and failure of these products is the level of public confidence in the institution, size and image of the institutions and its reputation. Basically the big players that have a strong base and a big network have used and taken advantage of their image to make their product launches a success.