TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Sep 29 - Oct 12, 2008

Growth and diversification of banking operation over a period of time has manifested in developments of several modern and convenient to customers' financial intermediation procedures nationwide, but skeptical bankers have still cogent doubts about the mutual symmetrical progress of banking and repudiated the entire banking sector merry-go-round as carnivore on the flesh of masses. The doubt descends right down the common practice of banks to pay less on liabilities and earn more on assets.

In petition filed before Federal Shariah Court against State Bank of Pakistan, Dr. Shahid Siddiqui claimed that banks operating in Pakistan were in violation de facto of basics of agreement signed with customers at the time of account opening. According to him, it is clearly stated in a circular issued by the State Bank that other than current account all bank deposit accounts understate profit and loss sharing agreement. And banks are not paying profits to depositors accordingly. State Bank as regulatory body which can intervene in determining rate of interest is to be defendant in the case.

Aggregate profits of banks have jumped to $1.8 billion and deposit base to $60 billion. In fact, State bank has expressed its intention to increase the deposit base to $217 billion in its 10 year strategy and vision for financial sector paper.

As opposed to leaping rate of inflation, PLS accounts offer nominal markup on deposits however price of loan is disproportionably high.

Interest spread is disadvantageous for both depositors if it is due to low rate of payment on deposits and for borrowers for high cost of borrowing discourages investment. Treasury bill-most favorite medium of government borrowing-becomes more attractive because of the monetary tightening and increase in lending rate.

State Bank should implement the regulations in conformity of the circular and must pay heed to an open aberration by banks, he said. This petition is not against any particular bank but all banks. "When profits accumulated by banks were insignificant in Pakistan deposit accounts carried low markup and still the rate is low despite multifold growth in profits." Growth in profitability of banks must be shared with customers, "as stated in the circular of the State Bank", blasted out enraged Siddiqui.

"Banks, by lowering the rate of returns payable to depositors despite enhanced profitability, are discouraging savings, which is not only having a negative impact on the economy but is also increasing Pakistan's dependence on external sources which is not in the best national interest of the Islamic Republic of Pakistan," mentioned in the petition, a copy of which has already been sent to the perusal of the State Bank, told Dr. Siddiqui.

Returns on deposits would have been much higher, had the banks shared their profits with depositors in an equitable manner as the total pre-tax profits of banks had gone up from Rs. 7 billion in 2000 to Rs. 123.6 billion in 2006. He recalled the circular issued by the State Bank in 1993 that depositors must be paid in accordance with the banks profitability. "Going against this is nothing but sheer exploitation and travesty of justice and is accordingly un-Islamic."

Partially monetary tightening brings upward rise in interest rate of banks investment, pulling up lending interest rate, loosening strains on Treasury bill by making it more attractive whereas it does not have parallel impact over the cost of funding to banks, stagnating as always markup on deposits. Limit of 5% rate of return on deposits is still far below the earning of banks and prevalent rate of inflation.

When Syed Wasimuddin chief spokesperson the State Bank was contacted, he declined to comment on the issue and said "the case is to be dealt by the Court". Abruptly he refused even to put the question before any relevant official of the State Bank when asked about departmental expert's opinion on the petition.

"As market matures competition will encourage better alignment of interest rates both on deposits and advances," noted in ten year vision and strategy for financial sector paper of the State Bank, which plans to establish depositor protection fund and advocates indispensability of enabling policy environment for increasing financial penetration ratio. The argument of skepticism is pronounced well that if despite rising competition particularly in banking sector so far banks have failed to pass on benefits of growth to deposits as well as advances then how better the alignment would be in future.

Empowering and gearing the primary regulator will be [a] key to keeping on track and effectively implementing the reform agenda, scribed in the epilogue of the paper.

The limited alternative avenues for financial intermediation available for small investors are attributed as reason behind interest spread, detracting investment off banks, making cost of funding low as well.

According to Dr. Siddiqui the complaint has no other motive than to serve the interest of common man. "For the sake of account holders, I am filling sue against the contravention of account holder-bank agreement by banks".

In addition, Supreme Court green signaled action of competition commission of Pakistan against Pakistan banking association members of which allegedly involved in cartelization. Earlier SHC order restricted it for taking any punitive step against association.

Expanding of outreach and mobilization of deposits would be successful if investing in banks becomes profitable for investors. As the central bank boasts of its primary role in introducing price stability through autonomy for macroeconomic performance, it must ensure that banks be not drifted away from the given path to churn out profits. This may be preposterous to up-and-coming financial reforms and above all for attracting investors to build up deposit base. Indeed, financial sector of the nation can not flourish in a stifled policy environment, but flexibility of regulator to adapt to changing circumstances would fearfully be birthing market exploiters.