Apr 28 - May 11, 2008

Perhaps for the first time in the history of Pakistan, Commercial Banks have been penalized for their cartel like behaviour to amass huge profits by depriving their poor depositors of their due share. It was noticed that there was a gap of 7 to 8 percent between what the banks in Pakistan were paying to the depositors and what they were charging from their borrowers, which has no parallel in the world. In the process the profits of banks in Pakistan has risen to Rs.170 billion in 2006/07 from Rs.17 billion in 2003.

Finding them guilty of cartel like behaviour, CCP has imposed penalty of Rs.25 million each on seven banks and Rs.30 million on PBA giving benefit of doubt to the remaining scheduled banks and members of the PBA.

The seven banks which have been fined Rs.25 million include:

1. Habib Bank Limited
2. Allied Bank Limited
3. MCB Bank Limited
4. United Bank Limited
5. Saudi Pak Bank Limited
6. Atlas Bank Limited
7. National Bank Limited

CCP has announced its decision after completion of all proceedings. This decision was regarding the suo moto notice taken by the CCP in response to the advertisement to introduce the Enhanced Savings Account (ESA) made by the Pakistan Banking Association (PBA) on behalf of its members banks, which indicated collusive or cartel like behavior.

The order issued states that the subject advertisement falls within the purview of the prohibitions prescribed by Section 4 of the Ordinance. Section 4 of the Ordinance in its relevant parts reads as follows:

"Prohibited agreements.- (1) No undertaking or association of undertakings shall enter into any agreement or, in the case of an association of undertakings, shall make a decision in respect of the production, supply, distribution, acquisition or control of goods or the provision of services which have the object or effect of preventing, restricting or reducing competition within the relevant market unless exempted under section 5 of this Ordinance"

The Commission's order has noted that in the enquiry and hearings held in the matter, the PBA and several of the banks asserted that the ESA scheme was introduced in consultation with the SBP. It was pointed out in the Order that this position apart from being inaccurate misses the fundamental point.

"The issue before the Commission was not the introduction of a saving scheme by a bank pursuant to a SBP circular but whether the terms and conditions of the ESA scheme prominently advertised by PBA is tantamount to a breach of Section 4 of the Ordinance"

"While the Commission was fully aware of its statutory duties and the scope of its functions, it was also duly cognizant of the role of SBP as the apex regulator of the Banking Sector. The Commission does not encourage PBA or any bank to suggest that the SBP was, directly or indirectly, a party to any practice deemed anti-competitive under the Ordinance. No evidence had been placed on record by PBA to support that the ESA scheme has the approval/blessings of SBP."

The order stated that it had become abundantly clear that the PBA decision vis--vis ESA scheme had the object or effect of preventing, restricting or reducing competition in the banking sector, hence a violation of section 4 of the Ordinance. The PBA was careless to the extent that it advertised the ESA scheme in the national press and held a question and answer session to discuss it fully, without regard to the impact of such decision on the market.

The order further elaborated that a decision of an association of undertakings reflects an understanding between its members and when such a decision is acted upon by a member bank it constitutes an "agreement" between the association and the member, as defined in clause (b) of sub-section 1 of Section 2, which reads as follows:

"agreement includes any arrangement, understanding or practices, whether or not it is in writing or intended to be legally enforceable" The subject advertisement in itself reflected a declared understanding reached between the members of PBA.

It is reasoned in the order that where such arrangement was acted upon, there could not be a more formal version of acting in a cartel like behavior. Cartel formation or cartel-like behavior did not always pertain to raising the price of product or services to a level higher than the one prevailing under normal competitive conditions. Cartel formation or cartel like behavior is established where price is fixed, regardless whether it is raised, lowered or even rendered stagnant.

It has been explained in the order that ostensible purpose of the ESA scheme was held out to be in the public interest thus clouding the real intent i.e. to cap the interest payable by the members in a competitive environment. The banks, it was declared, are not welfare organizations but commercial entities. Therefore, primarily they have to look after the economic interest of the company and its shareholders.

Even though penalties could have been imposed on all scheduled banks which are members of PBA based on the subject advertisement which admittedly is a decision of PBA, however, participation in the prohibited agreement could be best established in cases where ESA scheme had been implemented. For this reason, the benefit of doubt had been given to all those scheduled banks which did not implement the ESA scheme.

Giving the verdict the order states that the PBA had acted beyond its mandate as per its own submission and owing to its lead role in the formation of a cartel of the banks which is prohibited under Section 4 of the Ordinance has been imposed a penalty the sum of Rs.30 million.

PBA has further been directed to discontinue this practice forthwith and not to repeat the prohibition specified in Section 4 of the Ordinance. The seven Banks that have been penalized are these which implemented the ESA Scheme hence establishing their participation in the cartel.

Details of the penalties are as under:-





Instrumental role and high culpability

Rs.30 Million

Habib Bank Ltd

Implementation of ESA Scheme

Rs.25 Million

Allied Bank Ltd

Implementation of ESA Scheme

Rs.25 Million

MCB Bank Ltd

Implementation of ESA Scheme

Rs.25 Million

United Bank Ltd

Implementation of ESA Scheme

Rs.25 Million

Saudi Pak Bank Ltd

Implementation of ESA Scheme

Rs.25 Million

Atlas Bank Ltd

Implementation of ESA Scheme

Rs.25 Million

National Bank Ltd

Implementation of ESA Scheme

Rs.25 Million

The Order said that "even though the violation by the above mentioned banks could have attracted maximum penalty, considering that the Ordinance is a new law and that due to non-enforcement of any anti-trust law in the past, (such cartel-like behavior had apparently become a norm), the order has taken a lenient view and a lower penalty has been imposed. All remaining banks are exempted due to their non implementation of ESA Scheme and their low or even negligible level of involvement and culpability."

In this whole episode, what is most surprising is the role of the State Bank of Pakistan. Being the main regulator of the banking sector, it was, primarily, the responsibility of the State Bank to keep an eye on the exploitative practices of the commercial banks and protect the interest of the depositors. To be honest they should have appreciated the initiative taken by the CCP for pointing a lapse on their part. What they did was, however, entirely different. The State Bank wrote a letter to the Ministry of Finance asking for an amendment in the Law placing commercial banks outside the purview of the Competition Commission of Pakistan. The Ministry, however, did not ..the State Bank.

Under the law the banks can file appeal against the verdict of (a single member) before a 2 member bench of the Commission. Not satisfied they can move the Supreme Court of Pakistan in appeal.