Analysts are of the consensus that those who wish to borrow money from the commercial banks have no option but to comply with the banking regulations, others prefer to stay away from opening accounts with the banks till it becomes inevitable. This is not any exaggeration but statement of the harsh reality, which is evident from financial exclusion. Since most of the accountholders just can’t borrow money from banks, they also don’t prefer to keep their money in banks. Added to this is the prevailing perception that keeping money in banks and receiving return is violation of teaching of Islam (Shariah).
Islamic banking started in Pakistan nearly 15 years ago with the commencement of operations by Meezan Bank but people have not opted for it the way they should have as Muslims. They keep the money in current accounts (offering no return) with the conventional banks and suffer from the complacency that they are not taking any Riba. According to a Shariah expert, “Keeping money in current accounts is the biggest disservice being done to Riba-free banking. Conventional banks get cost-free deposit and undercut Islamic banks by lending money at a lower rate. This gives an opportunity to the critics of Islamic banking to say the lending rates charged by Islamic banks are higher as compared to the conventional banks”. Another banking sector analyst said, “The average cost of one of the six ‘Big Banks’ is around 3% and even the other conventional banks find it difficult to compete with it”.
Those maintaining accounts with a commercial bank can be divided into the two major categories: individuals and business entities. The individuals mostly belong to salaried class, old people getting pension and dependents of overseas Pakistani surviving on remittances. They receive money usually once or twice in a month and withdrawals are as per their needs. One of the reasons for keeping money in the banks is security and not the return. Banks have been acting smart by convincing the depositors to use ATM cards, online funds transfer and payment of utility bills. This on one hand helps the banks in overcoming the inadequacy of limited number of branches and on the other hand reduces traffic at the branches. This way banks are able to retain depositors’ money for longer duration. Since the accountholders enjoy certain conveniences, they are neither bothered about return being paid on deposit nor take the pain to read the conditions given in the account opening form.
According to the laws of the country it is almost mandatory for business entities to maintain account with a commercial bank. The laws stipulate that buyers of goods and services to make payment through check. Online banking facility offered by banks reduces clearing time, which also encourages business entities to use banking channel. Owners of business neither bother to read the terms and conditions written in an account opening form. Even if they want, they can’t read because the font size is very small. On top of all most of the instructions are in English and could not be read due to the poor literacy rate in the country.
According to one of the studies, the overwhelming percentage of bank deposits belongs to small depositors but the biggest beneficiaries are multinational companies, local blue chips and exporters. Further analysis of bank deposits, lending and investment reveals some interesting facts which include: 1) bulk of the deposit belongs to small depositors but the lowest percentage of lending pertains to them. 2) Government of Pakistan is the biggest borrower and banks also prefer to invest in risk free government papers i.e. Treasury Bills and Pakistan Investment Bonds. 3) Since bulk of the lending goes to corporate entities, banks also prefer to invest in the shares of blue chip companies paying substantial dividend. 4) Lending to agriculture has grown substantially in the recent past, but interest rates being charged remain high and the biggest beneficiaries are feudal lords.
It is often said that lending to small bowers is risky and also expensive. However, it is on record that the largest percentage of non-performing loans pertains to big business tycoons and landlords enjoying access to power corridor. The financial sector experts around the world have the consensus that small bowers hardly default because they know very well that whatever paltry assets they have will be repossessed by the banks.
Another pertinent observation is that the financial institutions delay repossessing assets to the most. Their first preference is to reschedule repayment. They know that repossessing the assets and their disposal is very difficult. Costs of assets are highly inflated by the borrowers, who hardly have the intention to repay the loan, but make huge kickbacks. Various studies show that the largest percentage of non-performing loans pertains to textile and sugar mills, mostly owned by cronies and turncoats.
Development Financial Institutions (DFIs) like Pakistan Industrial Credit & Investment Corporation (PICIC), National Development Finance Corporation (NDFC) and Industrial Development Bank (IDBP) went delinquent because of lending to those enjoying political clout. This establishes a fact that as long as financial institutions continue to indulge in SRO based lending the probability of loan defaults will remain high. Financial institutions have to learn to lend on the basis of economic viability of the projects, rather than association with any political party or linguistic group.
The core activity of commercial banks is to provide working capital or loans having less than one year tenor. However, in the absence of DFIs and specialized financial institution, the governments have been forcing the commercial banks to participate in politically motivated Public Transport Schemes and loans for youths. Banks may be encouraged to participate in such schemes, but government should not make their participation mandatory.