BANKING & INSURANCE

An overview of these merging sectors

A. M.TALHA
June 25 - July 01, 2007

As per the Government's decision, the insurance sector has been opened to overseas investors. The Government has also allowed the banking sector to enter into the field by permitting the owners of the private banks holding equity of 70 per cent and above to establish insurance companies in the name of the concerned bank. The private sector owners of Allied Bank Ltd. can instantly establish an insurance company as they comply with the aforesaid requirement. Habib Bank Ltd. and United Bank Ltd. can also do that after they acquire the required equity. At present foreign owners of United Bank Ltd./ Habib Bank Ltd. are holding 50 per cent /25 per cent equity in these banks.

If that happens, which is very likely in the due course of time, the owners of the banks will emerge as a powerful cartel covering a very large and important segment of the economy and gain leverage to coerce the borrowers by linking the advances with the insurance covers to be obtained from their company. What impact will that have? Concentration of huge economic power in a few hands.

It would be recalled that at the fag end of the Ayubian era, there has been a lot of talk about the concentration of national wealth in a few hands- the 22 families. The move was led by a prominent economist Dr Mahboob-ul-Haque. It was then believed that these families not only owned the banks but also the industries and consequently, the banks extend loans to the pre-selected borrowers which render other sections devoid of the required bank credits.

Then in early 1970s, we saw an era of socialization [government take-over-I will not call it 'nationalization' as it is a relative term, you can nationalize foreign assets and not the assets owned by your own nationals. There has been merely one instance of nationalization in Pakistan when American Life Insurance Company was nationalized] of banks, industries excluding textiles, educational institutions etc. Even the small ginning factories/ rice mills were not spared. The government take over of private banks resulted in emergence of five large-sized banks in the public sector i.e. Habib Bank Ltd., United Bank Ltd., Muslim Commercial Bank Ltd. And Allied Bank of Pakistan Ltd. while the 5th bank- National Bank of Pakistan- was already in the public sector. The domestic banking sector did not expand beyond these 5 banks as government did not permit establishment of new commercial banks in the private sector. The branches of foreign banks were, however, operating in the country side by side with the public sector banks. However, deposit/lending/branch network base of the foreign banks had no match with these large public sector banks which created a monopolistic position in the banking sector.

With the passage of time, the banking sector [as well as the industrial sector] fell into the hands of the bureaucracy which left no stone unturned to destroy them. Habib Bank Ltd and United Bank Ltd. virtually reached bankruptcy. At this point of time, the government gave a second thought to the policy and decided to privatize the banks after salvaging them with public funds. Muslim Commercial Bank Ltd. was sold to the private party during the first tenure of Nawaz Sharif. Nawaz Sharif also permitted opening of about a dozen small banks in the private sector. Habib Bank Ltd. and United Bank Ltd. were sold by the present rulers in 2002/2003

The questions are raised whether the new policy changed the monopolistic status of 5 large banks? Let us examine. In this connection, we append Table 'A' containing the relevant data for the years 1999 and 2006:

It will be seen from the Table 'A' that the share of these 5 large banks in the deposits of the banking sector fell from 77.41 per cent in 1999 to 58.65 per cent in 2006. As for advances, these large banks share at the close of 2006 was 55.58 per cent when compared to 70.09 per cent in 1999. The unremunerative [on which banks do not pay interest] portion of the deposits of these large banks increased from 23.78 per cent in 1999 to 26.3 per cent in 2006.

These large banks were collectively in the loss of Rs 2.463 billion in 1999. In 2006, they have earned huge pre-tax profit of Rs 84.605 billion. Although, SBP has not released the profit figures of the banking industry for 2006, it will not be unreasonable to expect that the share of these large banks in the banking industry's profit will not be less than 2/3rd.

Is the monopolistic position in the banking industry in public interest; would it be rationale to further strengthen them by putting insurance business in their clutches? Should that policy continue or should the authorities devise policies to check the monopolistic trend?

Obviously, the monopolistic condition in the banking sector or its further strengthening is not in the larger public interest. The time has proved this. The [monopolistic] owners of the four large banks are minting money at the cost of the depositors. SBP, Governor's directives to these banks to share their huge profits with the depositors go unheeded. Thus SBP has proved totally hapless before this banking cartel. The weighted average deposit rate [WADR] of these large banks has fallen from 6.03 per cent in 1999 to merely 2.42 per cent in 2006 while their remunerative deposits/pre-tax ratio has swelled to 6.48 per cent in the year 2006. MCB Bank Ltd. has emerged as the most exploitative bank for the depositors as its WADR in 2006 has been the lowest @ 1.13 per cent as against while its remunerative deposit/ pre-tax profit ratio swelled to exceptionally high range of 10.7 per cent [Please see Table]. This bank is also not prepared to follow the SBP directive to send half-yearly statements of accounts to its customers.

TABLE 'A' PERFORMANCE OF 5 LARGE BANKS.
[FIGURES IN RS BILLION]

1
YEAR / HEAD

2
NBP

3
HBL

4
UBL

5
MCB

6
ABL

7
TOTAL

DEPOSITS AS OF 31-12-1999

Remunerative

216.736

211.215

96.262

103.043

56.493

683.749

Un-remunerative (Current accounts)

78.018

40.564

30.871

27.293

36.615

213.361

Total deposits

294.754

251.779

127.133

130.336

93.108

897.110

Other borrowings

39.215

48.958

19.533

23.146

10.806

141.658

Grand Total

333.969

300.737

146.666

153.482

103.914

1038.768

Interest paid

20.906

17.985

7.509

9.352

6.953

62.705

W.A.D.R.

6.26 %

5.98 %

5.12 %

6.09 %

6.69 %

6.03 %

Total deposits of scheduled banks Rs 1158.959 billion
Share of large banks in scheduled banks' total deposits 77.41 %

DEPOSITS AS OF 31-12-2006

Remunerative

363.829

364.093

246.391

172.870

149.608

1296.791

Un-remunerative

138.043

95.047

88.687

84.590

56.423

462..790

Total

501.872

459..140

335.078

257.460

206.031

1759.581

Interest paid

13.072

10.590

9.822

2.907

6.125

42.516

W.A.D.R

2.60 %

2.30 %

2.93 %

1.13 %

2.97 %

2.42 %

Total deposits of scheduled banks. Rs 2999.895 billion
Share of large banks in the scheduled banks' total deposits. 58.65 %
Increase over 1999: Scheduled banks: 158.84 % Large banks: 96.14 %

ADVANCES (GROSS):

As of 31-12-1999

139.615

180.805

78.738

71.496

58.218

528.872

As of 31-12-2006

348.370

371.365

260.910

206.848

151.705

1339.198

Total advances of scheduled banks 1999: 754.561 Share of large banks. 70.09 %
Total advances of scheduled banks 2006 2409.478 Share of large banks. 55.58 %
Increase over 1999: Scheduled banks 219.32 %. Large banks 153.32 %.

PRE-TAX PROFIT

For 1999

0.311

(5.309)

1.253

1.211

0.071

(2.463)

For 2006

26.311

18.840

14.292

18.501

6.661

84.605

OUTSTANDING AMOUNT OF PROVISIONS AGAINST NON-PERFORMING LOANS (NPLS):

As at 31-12-1999

17.322

26.914

17.499

4.063

2.955

68.753

As at 31-12-2006

32.260

21.932

13.600

8.608

7.671

84.071

Provisions of all scheduled banks 2006 Rs 127.611 billion Share of large banks 65.88 %
Remunerative deposits/ pre-tax profit ratio.

1999

0.143 %

-

1.30 %

1.18 %

0.125 %

-

2006

7.23 %

5.17 %

5.80 %

10.70 %

4.45 %

6.48 %

Source: State Bank of Pakistan's [SBP's]publication 'Handbook of statistics on Pakistan economy, SBP website- weekly statement of position of all scheduled banks and annual reports of the respective banks for 1999 and 2006. WADR: Weighted Average Deposit Rate.

The SBP's policy of merger of the smaller banks in the larger ones formulated by its previous Governor Dr Ishrat Hussain so as to reduce the number of banks to 20 is still in effect. This is strengthening the cartelization in the banking sector while, SBP as a regulator is completely hapless before the cartel.

The entry of the large privatized banks into the arena of insurance will further add to their strength resulting in accumulation of bulk of the country's economic resources in a few hands which will run not only counter to the objective of bringing equity and justice in the society but will also increase regulator's helplessness.

Obviously, these policies need to be reviewed failing which, apart from creeping in of malpractices/coercion in the banking sector, the process of concentration of wealth in a few hands will re-emerge as had happened in the Ayubian era.