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Money and Power

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 over Rs. 4000 million 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 this person (who has a dozen houses in Defence Housing Authority, Karachi alone) 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”. This gentleman had the gall to hold even the powerful ISI to ransom recently. 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 hit-man. 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 reform 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.

Money and power seem to be as perennially inseparable as Siamese twins. Whoever has money yearns for power so that he (or she) can make more money while those having power must utilise that power to acquire money that gives them the potential of acquiring additional power. No holds are barred in achieving these mutually supporting objectives, whether it be a dictatorship or a democracy. The gross misuse of power for personal ends is a continuing process that can be speculated upon but no authority in Pakistan has yet had the courage to take definitive steps to prevent this or bring the culprits to book in exemplary fashion. Moeen Qureshi’s credibility was enhanced when he gave a hint of punitive measures.

The 50s and 60s saw people acquiring money through official favours, mainly through permits and evacuee property, dispensed by the bureaucracy for a “consideration”. If you were a relation or a close friend then blatant nepotism took over as the only consideration. Some people who did not have money or influence had the entrepreneurial skills to take calculated risks in purchasing “permits” and/or getting evacuee property allotted, recouping almost all their investments in the opportunity-filled environment in Pakistan. The deserving did not all get left behind, more than a handful did come up on the basis of merit and the necessity of the “ungodly” to display some “honesty” for public consumption. For the most part, a new elite of “fat cat” bureaucrats and nouveau rich came up the social pecking order. Other than the sale and transfer of permits and plots, corruption till the 70s mostly involved government tenders being fixed for the non-deserving at the expense of the deserving. The educated mostly lost out in this rat race because of their compunctions in upholding right over wrong. Doing the right thing turned out to be tragically wrong for their children, preferring rich ideals they stayed mostly on the poverty line. Quite a few among the educated were intelligent enough to perceive that “wrongs” would ultimately be made right by the power of money. These smart people became the leading edge with respect to “culture” and “society”, mind-boggling, but true. Corruption became the touchstone of the new society as society degenerated in the real vulgar sense. Money buys respectability so easily that a very well known gold smuggler is even now socially most sought after by bureaucrats and businessmen, their public grovelling is commonplace at any social function that he is seen.

The traditional method of acquiring power was for the rich elite in the urban areas to purchase the loyalties of the local police. In a sense the same analogy vows holds true on a grander national scale, except that this exercise involves all the law enforcement agencies (LEAs). The honest officers among the LEAs stand out as the odd ones among a sea of corruption, the rewards for violating rather than conforming to the tenets of the law being much more. With the electronic age bringing the luxuries of the world into the living rooms of all and sundry, the temptations become much more pronounced. The acquisition of money and power by the ill-educated or the uneducated is done much more by peasant cunning than by applying real intelligence, i.e. blue collar criminals have moved into white collar crime, being blatant rather than being suave and sophisticated as would be the normal wont of white collar criminals. In Pakistan, it started with the nationalisation of banks when for the first time the bureaucracy discovered that life was much more rewarding by influencing and manipulating loans and credits into dubious projects and then defaulting on the repayments. Within this scam a new scam was discovered, the wholesale write-off of billions and billions of Rupees, for a price, off course.

Whatever may be the demerits of the Martial Law Government 1977-1985, the amount of loans sanctioned and the defaults remained within a limit, if not a satisfactory percentage. Since 1985, a confluence of politicians, bureaucrats, financial executives, businessmen and agriculturists have individually and collectively looted the nationalised commercial banks (NCBs). When the loan defaulters list was published by the Moeen Qureshi Administration (on the judicious instigation of Judge Tiwana of the Lahore High Court) there was panic among the handful rich and celebration among the overwhelming mass that made up the poverty-stricken poor. For the first time in the financial history of this country, adequate proof about people who had benefited from the wholesale plunder of banks became public property, it was no surprise that they comprised the elite of this country. The list was defective insofar as it did not clearly spell out the Principal Sum involved, the interest due (as well as the forbidding and unpayable penalty), the name/s of the person/s who actually decamped with the money as well as those banking executives primarily responsible for sanctioning the credit in the first place. The affected financial institutions can collate this data in less than a week but unfortunately it is such a “smoking gun” that any banking executive carrying out such an exercise would be committing suicide. The helplessness of society to prevent this white-collar crime has had a backlash in giving an open licence to the criminal-minded to carry on looting, without bothering to use even a fig-leaf for the sake of propriety. In their implementation the present laws of the land do not reflect the spirit behind their enactment. When the guardians of justice come under the control of criminals, justice becomes a crime.

The latest modus operandi since 1990 is to put favourites in control of financial institutions. Manifest in the act of Banks’ nationalisation was to break the control that some privileged families exercised over financial institutions, leaving very little credit available to those less privileged. Nationalisation did correct this anomaly but the power of sanctioning money now become shared between a whole range of errant and greedy bureaucrats in the Ministry of Finance and banking executives. One can confirm that between 1977 and 1985, the maximum increase in the ranks of the rich in Pakistan, was in these categories. While the late Junejo was an honest man, in the real sense corruption in financial institutions proliferated in the new political environment which was created. With bureaucracy letting control slip somewhat to some politicians, a new class of senior banking executives ran riot in the wholesale plunder of the banking system in collaboration with them. If any non-governmental organisation (NGO) with investigative experience is given a mandate (and an incentive as bounty, say 10% of the plundered total they manage to locate), Pakistan’s financial coffers can be refilled dramatically. Excellent data may also become available to the Income Tax and Wealth Authorities e.g. the gentleman who plundered over Rs.4000 million from the banking system.

The present modus operandi has become so blatant that people of known dishonesty are increasingly put into control of some financial institutions with impunity, their lack of credibility and reputation makes them insecure and thus totally dependant on their masters for their continued existence, a solid insurance for their continued loyalty. Even the last bastion of financial integrity in the country, the universally esteemed State Bank of Pakistan is now under attack. Market rumours abound about the imminent replacement of the present incumbent, a man of known integrity and credibility. All the rumoured possible replacement candidates seriously lack the requisite credibility besides having a well-deserved reputation of being political chameleons if not outright crooks. The only reason one of the cronies has not replaced the present SBP Governor already is that there remains a fear that this action may well cross the fail-safe line as far as public opinion (and the Army) is concerned.

Whether one likes to talk about it or not, in third world countries, the Army usually wields the ultimate power and is thus the final arbiter of political destinies. In Muslim countries, this is more true than false, the only exception being Malaysia since in Turkey, Pakistan and Bangladesh there remains an uniformed input whatever one may say. Democracy is not conducive on the western pattern for Muslim countries, by having no such “democracy” qualms about a host of countries such as Indonesia, Egypt, Morocco, Saudi Arabia and the Gulf countries, etc the democratic western powers recognize this fact of life. As much power and influence as money can buy, unless that money can purchase the Army, the control of political power is still far short of the ultimate strength. Mao Tse Tung said that “power flows from the barrel of a gun”, no amount of democracy can camouflage this home-truth in a Muslim country. The first time around, Ms Benazir thought she had the Army by the short hair and suffered the consequences of under-estimation of their political nuisance value. Politicians have tried time and again to interfere in the Army’s internal working, only the late Z.A.Bhutto got away with his “Gul Hassan” act. Temptations arise when changes in senior appointments become due as and when the incumbents retire, such a process is now almost upon us. The selection process becomes a matter for speculation about various permutations and combinations. The uneducated particularly never learn a lesson, the abundance of money and status is usually heady enough to overcome the caution of inherent peasant cunning. If people thought 1993 was a year of crisis, they ain’t seen nothing yet in 1994.

How can anybody ignore the plunder that takes place under the fig-leaf of a democratic garb? To put it bluntly this is an amazing contradiction of one’s principles or quite simply ostrich-like behaviour. If those who should make it their business to know do not know what is going on then their intelligence agencies are incompetent (or worse, collaborating with the culprits) and if they do know and chose to gloss over it in the pursuit of this farce of democracy to satisfy western mores then they are being grossly (and perhaps criminally) negligent. Anyone who knowingly condones crime or intent thereof becomes an accessory. The Nuremberg trials clearly laid out the parameters of what constituted “lawful exercise” and the perquisites of one’s conscience. The Medillin “cocaine cartel” almost took over the Colombian Government because of its money power, with power in the hands of the corrupt how long will it be that they use the combination of power and bags of gold to erode the foundations of the ultimate bastion of the nation’s integrity? We live in dangerous times and while it may be convenient, one cannot remain blind to the truth and one’s own responsibility. There is a gross dereliction of one’s conscience that may well become the nation’s epitaph, like it or not.

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