Jan 3 - 9, 20

Jim Collins has listed, in his book How The Mighty Fall, the following five stages of decline: hubris born of success, undisciplined pursuit of more, denial of risk and peril, grasping for salvation, capitulation to irrelevance or death. Pakistan's banking sector, having benefitted from unchecked cartelization and a weak and indifferent regulation, has already surpassed the first stage of decline. It is now indulging in undisciplined pursuit of more, without recognizing the risks involved, and in total disregard of its fiduciary responsibility. Looking strong on the outside, the banking sector is definitely sick on the inside as its ostensibly good health hides a prolonged history of betraying its depositors to maintain high profitability.

The recently announced nine-month (January to September 2010) results of the banking sector confirm this view. All banks recorded a profit of Rs50 billion, showing an 11 per cent increase over the corresponding period of CY-09. The five major banks accounted for 98 per cent of the total profits. We often raise hue and cry for having the highest banking spread in the region - around 7.5 per cent. But, the fact is that the high-profile, cartelized banks that boast of having a 98 per cent share in the total profits for a certain period are operating with a spread of 10 per cent. The 'also-ran' type, medium and small-size banks, are left with a spread of less than five per cent. Where this cartelization of banks is going to take the nation and the economy?


Period General banking spread (based on total loans and total deposits) General banking spread (based on fresh loans and fresh deposits)


June 2008 6.78% 5.72% 7.50%
June 2009 7.52% 6.74% 9.62%
June 2010 7.60% 6.42% 8.90%
August 2010 7.56% 6.09% NA

The much trumpeted success of Islamic banking, when viewed, in the background of a nine per cent banking spread, will not look very healthy. Capitalizing on religious inclinations of the majority of Pakistani population, the Islamic bankers could have set an example by demonstrating that banking systems, Islamic or conventional, can be made to operate with a spread of 3 to 4 per cent.


Sri Lanka 2008 8.00% Hong Kong 2008 4.55% Malaysia 2008 2.95%
Bangladesh 2008 6.72% Philippine 2008 4.26% Kuwait 2008 2.81%
Pakistan 2008 6.02% Qatar 2008 3.88% Oman 2008 2.62%
Nepal 2007 5.75% Bahrain 2007 3.87% Japan 2008 1.32%
India 2010 5.50% Jordan 2008 3.57% South Korea 2008 1.30%
Indonesia 2008 5.11% Libya 2008 3.50% North Korea 2008 1.30%
Singapore 2008 4.96% China 2008 3.06% Iran 2007 0.4%
Thailand 2008 4.56% Vietnam 2008 3.05% . . .

Pakistan is placed after Sri Lanka and Bangladesh, but the fact that the five major banks, forming core of our banking sector, operate with a bank spread of around 10 per cent puts us on the top of the list, meaning we have the highest spread in the region. How this high spread results in unusually high bank profits, and how this easy sailing has been eroding the professional acumen of our bankers should not be difficult to understand.

An exorbitantly high bank spread tends to siphon off the wealth of common person into the bank coffers giving rise to unhealthy wealth concentration on one hand and making dents in the disposable income of masses on the other. So, one attribute of a high bank spread is its inflationary power.

Further, an unusually high bank spread results both from low deposit payouts and high lending charge. High lending charge in turn depresses the economy and stifles growth. So, its recessionary force is yet another attribute of a high bank spread. The excessive wealth accumulated on banks' balance sheets has a number of uses. In the case of foreign banks, it is repatriated to the base country. In case of local banks, a portion of it is utilized to oblige the corrupt and powerful segment of the society, in the shape of huge loans and subsequent write-offs. Another portion is swallowed by the top brass of the banks, in the shape of high salaries, bonuses, perks etc.

During the decade, the difference between the salaries of top financial executives and a lower echelon worker has widened to an unbelievable extent. In the United States, it is currently 531 times. Since our financial sector culture has its roots in the US financial systems, one can easily infer what the size of top bank executives' remunerations could be.

Jim Collins describes 'hubris' as excessive pride that brings down a hero or outrageous arrogance that inflicts suffering upon the innocent the innocent in our case being the depositors who, being unwary of the intricacies of the modern financial system, put their money in the banks and faith in the bankers. It is their money which is used for the creation of high-powered credit money that runs in the arteries of economy on one hand and generates huge profits for the banks on the other.

The voiceless poor lot does not get the returns it deserves. Moreover, the major claimant to the credit money thus created by the banks should be the business and industry. Our innovative bankers have found a novel way to manage their risk by focusing on the government as they find it a zero-risk borrower. This shift in banks' focus has brought more pains to the private sector which is already reeling from the shock of imprudent monetary policy.

Do the rising profits at the expense of the disgruntled lot of depositors, highly cartelized structure, and reliance on safe investment havens in the shape of government bonds, papers and securities augur well for the banks operating in an already troubled economy?