In fact, an element of cartelization has cropped into commercial banking sector as four to five major banks are holding about 60% of the deposits and their earnings are also likewise.
KHALIL AHMED, Senior Correspondent
Feb 19 - 25, 2007
The financial needs of trade and industry can be broadly divided in two categories; firstly the short-term finance for working capital requirement and secondly the long-term finance for capital expenditure for, inter-alia, acquiring capital goods including plant and machinery, etc.
Conceptually, the short-term credit needs of the business and industry are to be met by the commercial banks (which numbered 37 at the end of the calendar year 2005 and may have reduced to 34 by now due to mergers and acquisitions in 2006).
The special financial institutions (Investment Banking Institutions- IBIs) are supposed to cater to the long-term credit requirements of the industrial sector for capital expenditure. For this purpose, specialized institutions came into being. These IBIs presently comprise Development Finance Institutions (DFIs), Investment Banks (now called Investment Finance Companies -IFCs), Leasing Companies and Modarabas. But the commercial banks and the IBIs are undertaking business in over-lapping manner, while in certain cases, the legal framework of the IBIs permits them to undertake commercial banking business. A brief description of the institutions established for catering to the long-term credit needs is given below:
DEVELOPMENT FINANCE INSTITUTIONS
The largest DFI i.e. National Development Finance Corporation (NDFC) was established in 1973. In addition to the NDFC, seven more DFIs including Bankers Equity Ltd. were later established. However, after the NDFC's resources were eaten away through political lending, it was merged with National Bank of Pakistan. The Bankers Equity Ltd was sold to the private sponsors in the aftermath of mid-1990s but the purchasers could not run and it is finally being liquidated. The reason for its liquidation may not be different than that of NDFC. At present five DFIs are functional.
The Investment Banks, now called Investment Finance Companies (IFCs), started cropping up in 1980s and early 1990s - all in private sector. In June, 1990, their number was only 5, which multiplied to 16 at the end of June, 2000 and currently their number has reduced to 8. Although the basic business of IFCs is "investment finance", their present legal infrastructure allows them to undertake a variety of activities including those that are the part and parcel of the commercial banking but they are principally engaged in the capital financing.
As is put in the State Bank of Pakistan's Financial Sector Assessment for 2005 (FSA), the performance of the IFCs improved considerably during 2001-05 as reflected by rapid business expansion, diversification of products and services and improvement in the financial health.
The commencement of the leasing business dates back to mid 1980s when the first leasing company was established in 1984. The companies grew rapidly in 1980s and early 1990s. Their number swelled to 33 as on 30th June, 2000 but reduced to only 20 as on 30th June, 2005. This was mainly because reform process coerced the companies to increase their paid-up capital and the commercial banks' entry into the leasing business.
The noteworthy feature, however, is that the impressive growth was recorded despite reduction in the number of the institutions.
Modaraba is a contract between two parties, investor or financer, on the one hand and an investment manager on the other. Profit is distributed between the two parties in accordance with pre-agreed ratio. Any loss (to the capital) is borne by the financier. The investment manager's loss lies in not getting any reward for his services. Modarabas may be of various types which may be multi-purpose, perpetual or for a fixed period or close/open ended.
Modarabas had registered mushroom growth in the late 1980s/early 1990s because of Shariah-compliant and tax-free status. Ninety per cent of the profit was to be distributed. However, the initial growth momentum could not be sustained in the late 1990s due to the withdrawal of tax exemption and slow down of economic activities. The failure of the Modaraba managements to tailor the diversified products also resulted in the loss of confidence of the investors. The number of Modarabas functioning on 30th June, 2000 was 45 which has come down to 31 as at end-June, 2005.
Let us now examine the position of growth of these institutions during 1990-2005. Necessary details are contained in the following Table "A":
GROWTH DURING 1995-2005
[Figures in Rs billion]
Leasing companies Modarabas
Source: State Bank of Pakistan's Financial Sector Assessment for 2005. * 1990 data not available
It may be added that during the fiscal 2005-06 (FY-06), the amount of gross total investment has been estimated at Rs 1544 billion and the economy is growing at 7 per cent annually. Although the IBIs have progressed during the last over two decades, the size of their assets is still marginal and it obviously cannot cater to the investment needs of the expanding economy of the country.
For taking a view of the performance of these IBIs during 2005, let us dwell upon some core indicators detailed in the Table "B":
PERFORMANCE DURING 2005.
NPLs to loans
E.A. to totalassets
Lease finance to EA
Investment to EA
Interest rate spread
Source: as in Table"A". NPLs- non-performing loans. E.A: Earning Assets. ROA: Return over assets. ROE: Return over equity.
As per the State Bank of Pakistan's Banking Sector Review for 2005, the commercial banking sector's pre-tax/ post-tax return over assets during that year was 2.8 per cent/1.9 per cent, respectively, while their interest spread has crossed 7 per cent. The IBIs have thus shown better performance than the commercial banks. In fact, an element of cartelization has entered into the commercial banking sector as 4/5 major banks are holding about 60 per cent of the deposits and their earnings are also likewise. This banking cartel is not prepared to listen even to the "Regulator" to give positive rate of return on the deposits and curtail the spread.
It is believed that the banking cartel is also endeavouring to stall the government's initiative to raise the interest rates on National Savings Schemes' instruments.
It appears that our country has since fallen prey to various "mafias" and no authority is available to redress the grievances of the common man, including the depositors of the banks.