Deterioration of Financial Institutions
The three major reasons for the deterioration of the financial institutions in Pakistan are (1) nationalisation (2) dependence of both the government and the private sector for liquidity exclusively on the banking system and (3) pre-emption of substantial part of the credit by the government. A myriad number of smaller inter-locking factors have contributed to the decline of the credibility of financial institutions in Pakistan but most can be traced back to these aforementioned over-riding reasons.
Two major concerns led to the nationalisation of the banks in the early 70s by the first PPP regime. Of primary concern was the fact that control of finances of the country interfacing with that of assets were in the hands of a very small minority. The other reason was that the priority sectors were neglected inasmuch social and even economic development were not supported by credit allocation viz, agriculture, small industries corporation, transportation, construction, etc. Money was concentrated in the urban areas at a severe cost to the rural areas. A great bulk of the credit was going to industry and trade which claimed about 67% of the credit given to the private sector with only the balance 33% going to the rest of the private sector economy.
Whatever may be the criticism of late Z.A.Bhutto’s nationalisation of banks, it did achieve the two-fold objectives of undoing concentration of wealth and the feudal ownership of the various financial institutions to a great extent but the damage to the system came from the erosion of accountability. Part of the problem lay in the multiplicity of controls in place of a single monitoring institution like the State Bank of Pakistan (SBP). Previously the SBP had exercised complete control in terms of regulation, supervision and imposing of financial discipline on the banks. With nationalisation came the Pakistan Banking Council (PBC) which became the proverbial fifth wheel and whose scope of work remains as yet undefined two decades later beyond being a link between the government and the nationalised commercial banks (NCBs). Successive governments have been using this link to their advantage to the detriment of the system, the vast period for lack of accountability being the period 1977 to 1985 when civilian bureaucrat Ghulam Ishaq Khan as Economic Czar of the Martial Law Administration brooked no interference from any quarter, even from the military in whose nominal name he was undisputed ruler of Pakistan’s financial kingdom. The biggest director/owner/ interferer in the banking system was the Finance Division itself. During all the Martial Law periods, a banking cell, staffed solely by civilian bureaucrats was working in the CMLA’s office, apparently to set matters straight in the banking industry but actually to derive the strength and authority of that particular office for their own purposes. In this manner the military took the blame for the shenanigans of the civilian bureaucrats. Over the years the role and effectiveness of the SBP was considerably marginalised as senior banking executives looked towards the minions and gnomes of the Ministry of Finance instead of their own professional judgement. Instead of imposing self-discipline, this led to a situation of grave financial indiscipline and many experienced bankers became a party to it. Other consequences of nationalisation was the creation of excess baggage for the banking system i.e. excessive employment and lavish expenditures. This together with a labour policy that gave undue licence to labour unions in the banking system resulted in policies being directed by the union leaders rather than management, this is no exaggeration. The only problem is that our sense of complacency and timidness has allowed the problem to continue. High employment and top-heavy management has resulted in inefficiency, high cost and above all disbursement of credit to parties who have taken the Banking System for a ride at a severe economic cost to the people.
The situation is so bad that in the case of at least one NCB, the non-performing portfolio (loans) is close to 30% of its assets, about similar is the case for the other big NCB. The result is that the provisions they have to make for bad loans has virtually claimed a big chunk of their profits. Combined with excessive expenditure on administration this has meant that the poor depositor is being virtually robbed, the pittance that he is paid — in the name of Islamic system of Profit-Loss Savings Account (PLS) — is a very low rate of return. It is not surprising that the people have been largely ignoring the banks for the purpose of savings. A great bulk of the savings has been going into government documents, bearer bonds and even the informal sector which promises much better returns than the banks. In such an atmosphere, coop scams and fake investment companies easily proliferate.
Instead of using their own equity for opening new ventures, modernisation, etc both the government and the private sector rely for liquidity on the banking system. This over-dependence means the diversion of financial resources from the economy. Coupled with over-invoicing for the purposes of equity, which is the hallmark of our industry, this has meant a strain on the resources of the NCBs. Project financing should have mainly been sourced from DFIs, by issuing corporate bonds or short-term papers.
The last reason for the present problems of the banking system is that the various successive governments have pre-empted a substantial part of the credit for the public sector leaving comparatively little for the private sector which contributes a great bulk of the production, investment, trade and to the GDP. Similarly there is virtually no emphasis on the Services sector which remains bereft of the type of advances given to industry despite the fact that it costs far less to create employment in this sector and with much less employment skills.
The overall environment is one of lack of accountability. In this wild-west atmosphere financial cowboys ran riot. One esteemed gentleman as Provincial Chief of a major NCB advanced hundreds of millions of rupees to fake companies owned by his associates. When this was discovered and he was removed from office, he twice made a comeback on the strength of pressure from authoritative quarters. Instead of being brought to trial he was “permitted” to “honourably” resign. Subsequently he was given permission to open a private bank by the Nawaz Sharif Government, to the credit of SBP they refused to let him become either Chief Executive or Chief Operating Officer, this restriction being made on the basis of the SBP reference to his original bank. However, it is widely rumoured that he is on his way back into the financial corridors of one of the remaining NCBs, this is certainly not on the basis of his reputation but on other “considerations”. A pattern of survival is manifest here of all those engaged in malfeasance, these men are good for conducting financial mayhem in all political seasons.
Personalities and the authority that props them up matter a lot. Mr. Khan as Chairman PBC was a strong man who brooked no interference or challenge to his authority. When Tajammal Hussain of HBL ran an independent course he was subjected to witch-hunting conducted primarily by the present Chairman PBC, Mohammed Ahsan. Nothing came of this enquiry except reinforcing the reputation of Mohammad Ahsan as an ineffective hitman. On the other hand, the fate of the last Chairman PBC, Mohammad Zaki, one of the finest banking executives produced by the country, serves as an example to all as to what happens to those who “mistakenly” chose the path of professional competence, honesty and integrity. Zaki had the courage of conviction in maintaining his ground through the entire period of the Nawaz Sharif regime, running afoul of the party in power on many counts. He supported the MCB denationalisation process but on principle opposed the Allied Bank move. He was removed by the Balakh Sher Administration, reinstated by the Nawaz Sharif on his return and then sacked by the Ms Benazir Regime when the new government took power. For political appointees this would be understandable and acceptable but this is no way to treat an apolitical technocrat who serves as a model for others, what example are we setting down the line? Are we sending signals to the young banking executives that this will be their fate even if they do not take sides in the political game and remain neutral as per their professional mandate? Many other examples can be quoted but these will serve to highlight the predicament of banking executives today and the lack of accountability in the system that allows motivated witch-hunting.
To bring our banking system back into line we must persevere with certain steps, prime among them being that the process of privatization must be stepped up. Both the MCB and Allied Bank are doing extremely well, in the hands of entrepreneurs and employees respectively. A graduated approach of disinvesting of shareholding may be followed rather than outright handing over. Next, the control of the banks must be tightened by strict observance of Prudential Regulations, good supervision and monitoring by one apex authority, the SBP. Thirdly, there must be consolidation of the smaller financial institutions that have proliferated like leasing companies (19), Modarabas (46) and investment banks (11), and their contribution to resource mobilisation analysed before allowing any new ones. Lastly, financial reforms have to be stepped up in which the interest rate structures must be rationalized, special courts and tribunals set up to step up recovery of outstanding loans and responsibility must be clearly identified about who is going to sanction credit in the commercial banks.
Despite all the bad loans and gross defaults, no action has ever been taken against any senior banker. To set the banking system back on track, the Ms Benazir Government must prosecute those whose reputation for malfeasance is well -known. The government must bring accountability back to the system, the only way to do so is to make examples of the worst offenders whoever they may be. If this is not done, the public perception will rightly assume that business is as usual and the heart of the PPP regime is ruled by a mind made up mostly of money.
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