Sep 15 - 21, 2008

Banking in Pakistan has grown with the passage of time and in line with the expansion of economy. The growth of banking in monetary terms in economies like ours is a self sustained phenomenon. High and persistent fiscal deficits need to be financed through jacked -up external and domestic debts. Banking sector's power to create interest based stock of debt money provides fuel to the fire of monetary expansion. While external debt's size keeps increasing in the face of high current account deficits, the size of domestic debt keeps ballooning to finance fiscal deficits and government spending. The economy size keeps expanding and so does the size of banks and their business.

According to the figures released for the week ended August 23, 2008, the total assets of scheduled banks stood at Rs.5.067 trillion with their deposits touching a mark of Rs.3.786 trillion. With the total banking assets accounting for more than 50 per cent of our GDP, the banking sector has assumed a monopolistic stance mustering sufficient courage to dictate its own terms. Prior to 9/11, our banking sector was struggling in the era of sagging equity values. The economic opportunities created after 9/11 saw our banks flourishing in real style. The banking sector has grown due mainly to favorable environment created partly by global events and partly by the controlling bodies who have till recently allowed banks to operate on their own terms in total disregard of the canons of equity and justice. The recent visible change in State Bank's policy stance has raised hopes of some discipilne finding way into the ranks and files of banks. The real growth of the banking sector can be measured by putting it to the test of following criteria:

* Good corporate governance

* Good financial management

* Social responsibility concept and capacity building

* Contribution to country's economic development

Good corporate governance of banks is obviously linked with the corporate governance of banks' client firms. Well managed profitable firms get a higher ranking in the banks' loan and investment portfolios. The banks, running a highly leveraged business, operate in a delicately poised environment with little margin to go wrong. The financial market intelligence keeps them on their toes. Any bonafide or perceived impression of malpractices could trigger a run on the deposits of the bank. SBP has issued guidelines on risk management, internal controls, IT security and business continuity planning. The Institutional Risk Assessment Framework (IRAF) and CAMELS-S approach contain such guidelines. The CAMELS-S approach means, Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Sensitivity and in addition Systems & Controls of banks.

Banks are now required to undergo credit rating process annually. Rating is to be announced publicly and disclosed in the bank's financial statements. SBP has also undertaken to get implemented in a phased manner the Basel-II regime. Initially the banks are required to adopt the Standerdized Approach for credit risk and the Basic Indicator/Standard Approach for operational risk from January 2008. After improvement of their in-house systems, the banks will have the option to adopt more advanced approach from January 2010. The Basel-II regime, however, is not being favoured as beneficial to the country's banking system. The SBP's enthusiasm to ensure its early implementation is being widely criticized. The regime is said to be aimed at :

* Wiping off the smaller banks and financial institutions to ensure further strengthening of the banking cartel. The recent increase in capital adequacy ratio and the requirement to raise capital to a minimum of US$300 million (Rs.23 billion in terms of present values) latest by 2013 are steps in this direction.

* Securing free access for international hegemonistic forces to country's classified financial data to perpetrate destablizing financial maneuvers.

* Giving a walk-over to the foreign banks who have adopted Basel-II under the Advanced Approach criteria.

Good financial management is wrongly associated with the swell of bank's bottom line. The higher the profits, the higher the stock value and thus higher the comfort level of stockholders. Caring for the well-being of stockholder is only one aspect of good financial management. If all stakeholders are not taken on board, the swelling bottom lines may reek of an air of malignancy around them. Depositirs, in fact, are the biggest stakeholders who have been short changed during the entire banking boom period. Low returns on deposits and high banking spread were the norms of that period. Unjustified write-offs and an ever increasing non performing loans ratio hurt the interest of the biggest stakeholders.

Weak regultory measures and the cartel like monopolistic bank behaviour acted in tandem to siphon off common man's money to the coffers of rich. Good financial management, if it can be called so, has been at the expense of depostors.

Social responsibility concept demands corporate interest in country's social projects namely education, health, sports, community services etc. with a view to building individual and institutional capacities. Given the tax benefits, such projects should be more in evidence than their actual number. Banks are certainly involved in such activities, particularly on the sports side, yet their participation, which is in total contrast to their economic size, leaves much to be desired. In community service sector, the name of EDHI is more known than that of any bank.

Contribution to country's economic development includes the size of values generated through tax payment and profit earning, job creation and carrying out of credit distribution programs. On corporate profits and tax payment sides, performance of banks has much to sing about a number of valid question marks on the cleanliness of profits notwithstanding. On employment scene, the banks will be found wanting in overall job creation. The lending agencies' downsizing programs dealt a severe blow to country's employment situation. The forced lay-offs, not only deprived banks of experienced and skilled middle management force but also halted their expansion programs. They had to apply cuts to their branch network size by pulling down the shutters of loss making branches. This trend deprived the country's remote areas not only of the then existing banking facilities but also of the future modern banking developments. Banks also failed in equitable and productive distribution of credit among various sectors of the economy. They even connived with the vested interests to divert productive credit to speculative fields thereby causing a serious damage to the country's economy.

To sum up, the growth of banking industry can best be described as incongruent and focusing on earning money from money.