Benefits and threats must be weighed before opting for the new system

July 19 - 25, 2004

Both the regulators and the players are exploring the pros and cons of introduction of concept of universal banking in Pakistan. The concept may not be new around the world. Broadly speaking the concept has been in existence in the country for decades. Now the plan is to implement it in the form as it is being followed globally.

First of all it is important to understand the very concept. Universal banking in general refers to the combination of commercial banking and investment banking. In a broader sense it encompasses financial services beyond commercial banking and investment banking, such as, insurance, leasing, investment advisory etc. However, universal banking does not mean that every institution conducts every type of business with every type of customer. In the spectrum of banking, specialized banking is on the one end and universal banking on the other.


The next point to understand is the mechanics or the way it could be implemented. Universal baking usually takes one of the three forms: in-house, separately capitalized subsidiaries, holding companies. Universal banking structure in these forms exists in various countries. In Germany, banks are allowed to conduct commercial banking and investment activities in-house, but separate subsidiaries are required for certain other activities. In the UK, a broad range of financial activities is allowed to be conducted through separate subsidiaries of the bank. The holding company model is common in the US and it also requires separately capitalized subsidiaries.

After understanding the concept and the mechanics, a review has to be made of the financial system prevailing in the country. Over the years commercial banks have been the most dominant players of the system and it appears that they would continue to enjoy this position. A number of banks have floated Modarabas. One of the banks has controlling stake in a leasing company. One of the DFI owns majority shares in a commercial bank and has also established an insurance company. Some of the banks have floated mutual funds and the management of funds managed by ICP has been transferred to a DFI and another fund management company.

Some of the critics call takeover of management control of Adamjee Insurance Company (AIC) by Muslim Commercial Bank (MCB) a dangerous trend. They say the precedence set by MCB would encourage other banks to takeover the management of blue chip companies. It would be of some interest that at least three of the large business groups of Pakistan were the sponsors of commercial banks in the pre-nationalization era. These were Habibs, Adamjees and Saigals. Along with commercial banks Habibs and Adamjees owned insurance companies and Manshas joined the club lately.

Interestingly the concept of universal banking has come under review at a time when the overwhelming feeling is prevailing that the activities of commercial banks should be restricted to their original mandate. According to some sector analysts, "The reason for this growing demand is that commercial banks have ventured into modarabas and leasing business and are exploiting the advantage of ample liquidity and extensive branch network, this creates uneven playing field for other players".

However, these analysts also say, "We do not oppose the entry of commercial banks in other areas. We want a level playing field, whereby banks form subsidiaries for undertaking various activities. It also sounds a little strange that the Securities and Exchange Commission of Pakistan (SECP) has initiated the debate on universal banking. One tends to get the feeling that the regulators not only support the idea but are also doing the lobbying for this".


However, one should not doubt the intention of regulators. The Chairman of SECP could not address a seminar recently arranged by the Institute of Bankers on the topic 'Universal Banking and Its Impact on Non-banking Financial Institutions'. However, the text of his speech distributed among the participants clearly enumerated the advantages and disadvantages of universal banking.

According to an analyst, "I am not amazed by the soft tone of presentation because the experience over the years clearly shows that most of the moves from the SECP come as 'suggestions for consideration' but sooner or later attain the status of rules and regulations. I have all the reasons to believe that it is the preamble for allowing the banks to expand the scope of their activities under universal banking".

Whereas another analyst was of the view, "I know that the past as well as the sitting Chairman are 'good salesmen'. It is also a fact that despite the initial resistance they have always been successful in implementing their own agenda. Most of the reforms undertaken by the SECP have yielded better results. It may be another thing that some times those 'being regulated' are not able to put up a convincing argument to support their point of view. Therefore, the blame can only go to those who do not do their homework properly".