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Private banks, finally!

The Government of Pakistan (GoP) has finally released a list of private banks approved by them. Over the last 15 years, we have been thrice beset by major financial scandals because we lacked the will and intent to formally commission the private banking industry and bring it within the ambit of government regulations as annunciated and implemented by the State Bank of Pakistan. This vaccuum was tailor-made for exploitation by the unscrupulous (and the un-Godly) and it has been, repeatedly.

Money scams operate on the principle that the mass of people want a quick return on their investments and that human greed tends to snowball as it goes along. The spurious investment companies that proliferated in 1979-80 based their activities on rosy promises made to the public of high interest payments, some even as much as 4-5% per month, thus dangling the prospect of doubling of the original stake in 2 years or even less. As Confucius is rumoured to have said, given such bait, fish bite! Using the old “Pyramid” technique perfected in the US many decades ago, the investment companies gave out exorbitant “profit” to the earlier investors from the funds deposited by the new investors, thus spreading their “fame” at the grass roots level, drawing in more of the gullible (“suckers” in their vocabulary). The investment companies also bought into areas such as real estate, consumer industries, etc with secondary emphasis on acquiring other lucrative ventures. These were long-term measures but to ensure a continuous supply of investors they had to acquire or be synonymous with prestigious projects while giving away exorbitant interest, this undercut their profitability factor. Because of the large funds being dished out as interest in increasing frequency, the pyramid was bound to collapse and it did. The first sign of trouble in any banking institution comes when it fails to honour its liability to any customer, whether it be outright refusal of or simply restricting the outward flow of funds, interest or capital. Even the hint of such a rumour and it spreads like a virus, depositors rush to take their money out. This creates a pressure of its own and the whole balloon bursts as the limited cash available cannot go on paying out regular monthly profits unless new cash generates liquidity, capital being tied up in movable or immovable assets. Almost 100% of the investment companies that proliferated in the two great scam periods of 1979-80 and 1985-87 had wilful intentions of fraud. As such they had diverted the hapless depositor’s funds to finance the purchase of properties in their own name or secreted the funds abroad.

Given the 1979-80 experience, the scam being repeated in 1985-87 was quite unbelievable. It was like Henry Wilson’s selling of the Eiffel Tower twice, and successfully. A large percentage of those who lost their life earnings to these unscrupulous scoundrels were ex-servicemen and civil service pensioners, particularly of the junior (and more gullible) cadre. “Golden Circle” scams were specially tailored by those who could appreciate that the common soldier was drawing approximately Rs 1.50 lac each as commutation of pension, using their connections these rascals managed to channelise entire blocs of servicemen into their direction. This was the period of semi-democratic rule of PM Mohammad Khan Junejo and establishment-created politicians got involved in abundance as a protection racket for the fraud perpetrators. The son of a Provincial Chief Minister was hand in glove with a well-known “investment” company which bought up property in a major commercial area. With that type of official patronage available, law enforcement agencies, supposed to monitor wrongdoing, tend to look the other way while getting involved in crime themselves. Basically these are white collar crimes but when selective lapses occur in the upholding of the law, the situation rapidly deteriorates into gangsterism as the investment companies hire musclemen and goons for taking over assets partially or wholly paid for and/or to keep depositors from becoming violent in the pursuit of recovering their hard earned earnings.

The State Bank of Pakistan did institute action against the recalcitrants but it was too little too late and was not directed against the more influential culprits. Hundreds of thousands of small depositors have been running from pillar to post to obtain justice, all this time the only ones earning money are the investigation agencies inquiring into the fake investment companies. Without the expert help of Chartered Accountants, no enquiry officer can be expected to unravel the accounts of any company, why expert help was never obtained is one of the questions one must ask the successive Governments? During the PPP regime, some headway was made in collecting and collating data, but it soon degenerated into a personal ploy by concerned officials/appointed persons for individual acquisition of “goodies”. Not much headway has been made either in the period that the IJI Government has been in power, the result has been another bout of loss of investor confidence leading to a run on long established Cooperative Finance Companies, mainly in the Punjab, and bringing them to their knees. Ridiculous as it may seem, lightning has now struck thrice in the same place. While the public is quite gullible, credibility would be hard put to explain how in the presence of repeated bitter experience, the absence of banking regulations governing them and the presence of hard evidence that the poor public was being taken for a ride, the Government of Pakistan (GoP) allowed these cooperative companies to function as retail banks. The PM’s decision last week, after a special meeting at Lahore Airport, that beginning Sept 01, 1991 depositors of funds upto Rs.50,000 would be allowed to withdraw their funds is welcome, what happens in actual practice should be well worth observing. This scandal has the potential of blowing into a full-fledged storm, glossing over her own ineptitude in bringing the recalcitrants to book, Ms Benazir is now crusading high and low on behalf of the masses. Cheating the poor and middle class, syphoning off their life’s savings is morally outrageous and the law enforcement agencies must take note of these crimes, which are actually financial terrorism and should be brought within the ambit of the Twelfth Amendment. Those who have been found wanting in the investigation of these crimes should also be dealt with arbitrarily under the same laws.

Other than awarding exemplary punishment, the only real way to ensure that these spurious, fraudulent investment companies do not periodically cheat the public is to instil confidence in the public about our existing banking system while increasing the return on investments to the public on their deposits and improving efficiency in banking transactions. The nationalisation of banks had put paid to entrepreneurial skills and though bank branches had proliferated, making banking more accessible, the service to customers and return on investments either deteriorated or remained stuck on a plateau. In this vacuum, the foreign banks did extremely well, it also exposed the shortcomings of the nationalised banks. One should not condemn the nationalised banks out of hand, they have rendered extremely valuable service to the community at large and, given the regulatory constraints of bureaucratic (and later political) interference, have done better than would be normally expected (or acceptable). Of primary importance is the fact that the social obligation to provide an easily accessible banking service to the public at large will be lacking in the charter of private banks in practice as small investors/depositors may not fall within their description of cost efficiency.

The performance of the banks in the private sector (MCB, ABL and the 10 new ones) will be watched with great interest by the general public. The credentials of the Sponsors of the newly approved banks are quite impeccable and impressive. Care has to be taken that corrupt banking officials who have made fortunes for themselves (and their friends and relatives) do not end up as owner/managers in these new banks, using honest and credible names as frontmen, later to step in as senior banking executives wielding day to day control. There must be a law that makes misdemeanour in financial dealing in banking a serious crime, force-multiplied if the perpetrator/accessory is in management. This law must forbid any convicted individual from being involved in any capacity with any financial institution forever. Private banks must obtain insurance for the deposits held by them either by Federal guarantees or private premium placements. This insurance can only be forthcoming once the antecedents of the owner/managers of the bank are verified.

With private banks in the hands of the entrepreneurs and in the hands of a Management-Labour Consortium, an amazing troika of dynamism has been created for healthy competition. Both Habib Bank Limited and United Bank Limited should be handed over to the Employees on a reasonable Management-Labour Buyout Plan, entrepreneurs being encouraged to open new private banks. This would leave National Bank of Pakistan and clutch of Development Finance Institutions (DFIs) in the public sector. Triangular competition would result in better banking services to the customers as well as healthy return on investments to attract investors. In a third world country, such a mix of the public and private sector is necessary as a means of check and balance. While welcoming the 10 new additions to the banking industry, permission for more private banks is keenly awaited.

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