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Reorganising the Banking Sector

Third World countries that aspire for economic prosperity have to ensure that their financial sectors are adequately equipped to fuel sustained growth. Financial institutions are the bedrock on which to plan the building of industry and commerce in a world perennially short of development funds, lately Less Developed Countries (LDCs) are concentrating their energies on revitalizing this sector. In Pakistan, we pay a lot of lip-service to such notions, in actual practice we consign reformation ideas to the dustbin and progress is far from satisfactory.

Pakistan has been known among the developing countries of the world for its special expertise in banking. One of the few international banks now competing world-wide with other major banks is BCCI, conceived and mostly (and ably) managed by Pakistanis. It is unfortunate that in a field where we have shown international excellence we should be in a total mess on the domestic scene. Unless we come to grips with the problems afflicting our economy and introduce extensive structural reforms the investment climate will not be conducive to rapid economic growth. We have to mobilise domestic resources, this can only be done by upgrading and streamlining the financial facilities.

The Pakistan Banking Council (PBC), created in the 70s by the then Finance Minister, Dr Mubasher Hasan, to by-pass the strict regulatory role of the State Bank of Pakistan exemplified in the person of the then Governor, Mr Ghulam Ishaq Khan, should be dismantled forthwith, as it serves no useful purpose and is simply a drain on the Government Exchequer, a bureaucratic clog in the smooth running of the financial machinery. At this moment, PBC is the refuge of all the former Presidents of nationalised banks, if the Government does not find them fit enough to run a bank why kick them upstairs into the cold storage of PBC? One of these characters, a favourite of our good doctor Mahbubal Haq, who made it to the top of a Bank last year leapfrogging dozens of executives, lasted only a few months before going onto the PBC, his utter arrogance was something to be believed out of the British Raj’s worst moments. The State Bank of Pakistan’s regulatory role (which incidentally has been recently reiterated by the Federal Government) precludes any earthly role that the PBC can play, even Dr Mahbubal Haq, with all his chameleon policies, realised as much when he cut PBC’s duties, making it at most a recruiting and training centre for potential bank executives. Most of the current ills of the financial institutions are actually because of gross mismanagement by senior PBC members (some with extreme parochial tendencies) and inadequacies of PBC rank and file down the line, except for the odd brilliant individual. We have recently been treated (for whatever individual political reasons) to a plethora of facts of immense loans sanctioned without reasonable cause or security to influential people over the last decade. If any genuine businessmen (without the necessary contacts) approaches them, they are told that “the ceiling has burst”. Tracing out connivance one would probably find that most of the advances have been made at the instance of either (1) the then Chairmen PBC or one of the Members and/or (2) Presidents of the Banks or the Members of the Governing Board. Where is the accountability if we just shuffle these unsavoury (and mostly corrupt) characters around like in a game of musical chairs from time to time? Even Mr Aitzaz Ahsan, our Interior Minister, normally eloquent about “Reference Points” in the erosion of the rule of Law during the last decade, seems to be positioning himself for compromise in the known cases of malfeasance in banking circles. Most of the present ills of the banking system can be traced out to a few unscrupulous individuals who survive regime after regime, except for the occasional retirement. Some of them have amassed greater wealth than many of the top businessmen of the country, earning “commissions” they have earned out of advances made by them from money belonging to the public, an enviable NO risk-ALL gain “business”. If Ms Benazir really wants to reinvigorate the investment and finances sector she must (1) scrap the PBC and (2) send most of the Presidents and Members of the nationalised banks into retirement, one can be assured that except for honourable exceptions none of them will die of hunger. Not for one minute can you disassociate these people from the bad loans made and the various malpractices. It has been impossible for genuine businessmen for the most part to get any advances without submitting to their demands and being part of their system of graft. It is time now that the “ceiling” came down on their heads! The sooner this surgical operation is carried out, so much the better for the country’s economy even though one cannot doubt that a number of innocents will suffer the knife.

Down the line, the middle-ranking banking executives have been terrorised into compliance by the holding of their careers to ransom. Self-respecting executives have left the nationalised banks in droves in sheer frustration to seek better opportunities in the private sector within Pakistan or even abroad, a great skilled talent exodus that has denuded the banking system of the enterprise and youth inherently necessary for bolstering badly-needed economic emancipation. Similarly our primate financial institution, the State Bank of Pakistan, has been sorely neglected with regard to the terms and conditions of service of its employees which should have been and must be at par with that of the nationalised banks. Though various turmoil in the system, not the least of them the aberration of finance ministers bent on cartwheeling economic policies, the State Bank has remained the rock on which the foundations of the economy has survived, it is time now to recognize that fact and carry out in deed such structural adjustments as may be necessary to persevere with that position. Within the State Bank of Pakistan also, a new dynamism is necessary, overhauling of old concepts is important to cope with the present financial realities. Efficacy and efficiency can only be improved and dramatically by the infusion of fresh blood.

As regards the nationalised banks, just privatising 40% of the shares won’t be enough. The government must retain only a token amount of shares for itself, earmark a bloc of shares for the employees of the banks (to be paid for by them) and float majority of the shares in the market in the Thatcher manner. This process should first be taken in the two smaller banks, MCB and ABL, and the results evaluated. The Governing Board of Directors of the Banks may be appointed from those who have achieved corporate excellence in their private capacities.

The government may appoint its own nominees on the Governing Board from the public and/or private sector but that should be the limit of its presence (and interference). The present balance sheets of the nationalised banks are normally cooked documents, these must be prepared by independent auditors appointed by the State Bank of Pakistan so that the financial picture is truly reflected, not one based on concocted figures by these past masters of deception. The banks real worth is hampered by the corruption and nepotism of Governing Board Members, past and present, which has led each bank into a horrendous debt situation, some of them quite large and/or irrecoverable. It is also true that most of the bad debts may have accrued because of advances made under political pressure, the question arises why did the senior management acquiesce and becomes accessories to the malfeasance? All debts beyond the limit of Rs one million and irrecoverable for over 1 year should be transferred to a new corporation entity to be created after due legislation called the Loan Recovery Corporation (LRC). LRC should be vested with such powers as may be legally necessary to recover bad debts. The banks who made the bad debts should be taken to task and the concerned officers made accountable. Those found guilty of outright corruption should be convicted and sent to prison, for repeated bad judgement their careers must suffer. With the creation of the LRC and shedding of bad debts all the nationalised banks will become much more viable and vibrant financially.

The Governing Board of the Banks must annunciate policy and general strategy, supervising a Working Board of banking professionals who have come up through dint of merit and experience. This should be an independent body taking day-to-day management decisions. It is utter nonsense that the President of a Bank, held to be responsible for billions and billions of rupees, cannot be considered a good judge of who and when to send somebody on an external trip, the decision to be taken by a Deputy Secretary of the Ministry of Finance. All the actions of the responsible officials in the bank are subject to audit and in a profit/loss situation the ultimate arbiter is the gain when compared ipso facto to the need.

Market forces rather than bureaucratic fiat must govern the working of financial institutions. In this respect, comparing the success of BCCI on a pro-rata basis with the overseas branches of our nationalised banks, one is put to shame. We think that it is within the realm of possibilities to make a profit of about US$ 300-450 million if we were to revitalize our foreign branches, the resultant efficiency of boosting much needed exports from Pakistan while streamlining our imports. With the development of communications, fluctuations in currency have become a world-wide phenomenon sometimes on a minute-to-minute basis. Our banks are woefully ill-equipped to take advantage of potentially profitable situations in the money market with the result that we are perennial losers. We still depend largely on antiquated methods and systems, our organisation and management are geared only to cope with 19th century scenarios.

We have had a terrible experience with investment companies that have looted the mass public at will, yet we must persevere with the concept of investment banks and leasing companies to create favourable financial conditions in the market, potential entrepreneurs must have access to easy credit. Our problem is that bureaucracy has delayed the concept of investment institutions in the private sector by a stifling selection process resulting in a vacuum fully utilised by unscrupulous elements (twice in the last decade). To understand this, one must take into account some salient facts, no investment companies are allowed (1) except with government permission and (2) more than a hundred of them flourished for over 2 years without government permission and (3) almost all of them collapsed because of outrageous promises which were impossible to keep. It would have been better if general parameters were laid down and deposit insurance created for investors upto Rs. 0.10 million, like in the USA where deposits upto US $ 100,000.00 are covered by the Federal Deposit Insurance Corporation (FDIC). If the deposits were covered by insurance from one of the recognized insurance companies, the potential investors would have had no difficulty in putting their money into the process with the compulsory proviso that the solicitation of money by advertisement in any form would clearly indicate the Cover Note of the insurance policy. With that proviso, the element of fraud would be greatly reduced as one can hardly doubt that any self-respecting insurance company will cover the deposits of potentially fraudulent investment companies. Other than a look at the Sponsors market reputation, that should be the only requirement to the granting of permissions. The State Bank of Pakistan can have a separate division to look after private retail and investment banks, exercising such control as may be necessary to prevent the fleecing of the general public by unscrupulous, criminally motivated elements. The bottom line is that investment companies are necessary, but with checks and balances to prevent the mishaps of the past. In the same breath we have too many DFIs in the public sector, these need to be reduced.

Unless funds are generated into the industrial and commercial enterprises from a combination of external sources and a broad spectrum of the masses, it will be impossible to vitalize the body economic of Pakistan. Our nationalised banks have performed hopelessly, the only glimmer of satisfaction has been the services rendered by the rank and file under very adverse corporate conditions. While one does owe it to the many thousands and thousands of middle ranking executives and lower staff to upgrade their facilities, we need to have foreign and domestic investment to keep flowing into worthwhile projects, creating employment opportunities providing for economic emancipation of the people of Pakistan in general. Ms Benazir must get down to the task of reorganising the banking sector without delay, the first important step is to infuse fresh talent into the senior management of the nationalised banks.

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