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State bank of Pakistan: Orthodox or prudent?

The State Bank of Pakistan is the central bank of the country as well as the apex regulator of the banking sector. Prior to independence from the British Raj on 14th August 1947, the Reserve Bank of India was the central bank of the areas of South Asia, now comprising of Pakistan, India and Bangladesh. After the independence, Qauid-e-Azam, Muhammad Ali Jinnah directed creation of Pakistan’s own central bank that was named State bank of Pakistan (SBP). It was also inaugurated by the Father of Nation. At president its Head Office is located in Karachi on I. I. Chundrigar Road.

Since the commencement of the central bank there has been persistent endeavor to grant and maintain its autonomy. However, often it has been felt that the policies of the central bank become subservient to the incumbent governments. Banking history in Pakistan can be broadly divided into three eras: 1) Pre-nationalization, 2) nationalized and 3) post nationalized. Each era enjoyed certain plus and minus points. However, with the commitment of the Government of Pakistan to grant and maintain complete autonomy of the central bank, appropriate amendments have been made in the regulatory framework and Prudential Rules. Some of the banking sector analysts term SBP orthodox and others give it the credit of being prudent.

Pakistan faced a difficult situation after its banking system was declared non-Shariah-compliant. At that juncture both the government and the central bank agreed to allow operation of Islamic banks in parallel with the conventional banks. It was a difficult decision, but the outcome does not seem disappointing. The first full service Islamic commercial bank, Meezan Bank, commenced operations in 2002. Now Islamic banks and designated Islamic banking branches of conventional banks own a little less than 15 percent of total banking assets. Pakistan has emerged as a role model for other Muslim countries. The biggest achievement of Islamic banking is that now it is called ‘ethical banking’. Many non-Muslims also chose to deal with Islamic banks after the 2008 global financial crisis. The most positive point was that while many of the big international banks faced technical bankruptcies, Islamic banks remained immune around the globe.

Despite having opposite perception about the central bank, analysts have a unanimous opinion that as an apex regulator of the banking sector, it has successfully discharged the responsibility of protecting the interest of all the stakeholders, depositors being the most important. It is on record that since independence, Pakistan has hardly witnessed any commercial bank going broke. Some of the critics may be prompt in referring to two names, Mehran Bank and KASB Bank. While the shareholders may have lost part of their investment, depositors remained fully protected because the central bank injected liquidity to save the banks from bankruptcies. During the nationalized era, the state owned banks witnessed turbulent times due to the colossal rise in non-performing loans. However, the central bank kept on injecting liquidity in the ailing banks. Some critics say that this was not a judicious use of taxpayers’ money.

The critics are absolutely right, but it is a common fallout faced by state owned companies/banks. The economists say that now the economy has become political economy. Political parties contest the elections on the basis of their party manifesto, making categorical disclosure of what they would do once in power. While the ruling junta remains accountable to their vote banks in the developed countries, in the developing countries elected government often indulge in corruption. Not only do they appoint incompetent people at key positions, but political activists are also provided employment in the state owned companies as well as those enterprises in which the government owns majority shares.

The overwhelming perception is that the SBP has been successfully regulating the commercial banks. However, some critics say that often the central bank becomes subservient to the political agenda. In the past, state owned commercial banks were compelled to participate in ‘schemes aimed at attaining political milage’. One such scheme meeting disastrous fate was ‘Prime Minster Public Transport Scheme. Critics are split in different groups, some do not agree with the basic model and others call it bad execution of a good policy. However, it is on record that private sector banks have often abstained from becoming part of any politically motivated scheme.

During the nationalized era about half a dozen local commercial banks and over two dozen foreign banks were operating in the country. In the early nineties when the Government of Pakistan granted permission to the local entrepreneurs to establish a dozen commercial banks, many critics questioned the wisdom. The current position is almost reverse because over two dozen banks are being operated by the Pakistani business groups and the number of foreign banks had reduced to almost half a dozen. One may also recall that most of the foreign banks decided to sell their Pakistan operations, may be because they realized that they would not be able to compete with the local banks, willing to operate at nominal spread. It is also on record that foreign banks used to ask the account holders to maintain a hefty amount as a minimum balance. If the account holder failed in maintaining this balance, an amount was deducted at the end of each month, it was a penalty for not abiding by the rules. As against this now most of the banks have bid farewell to minimum balance condition.

The central bank also decided to separate the ownership of banks with the management. Initially there was a resistance against this policy and some of the businessmen had to seek special permission to occupy the position of president of the banks. Along with this the central bank also stipulated per party exposure limit, which helped in hedging the risk in case any of the borrower commits default. Some analysts still insist that SBP is still following orthodox policies. However, it may be said that this policy has saved the banks from bankruptcies.

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