Sep 26 - Oct 2, 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, and 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 unhealthy banking practices.

The recently announced half-yearly's (January to June 2011) results of the banking sector bear out his views. The leading beneficiaries of the banking sector growth are the top five banks that account for around 95 percent of the total industry's profits.

The half-early results show the five banks sitting on profits worth Rs40 billion with an increase of 24 percent over the corresponding period of 2010. With around 40 banks operating in the country, the concentration of growth, and thus wealth, in just five banks is highly stigmatic, to say the least.

We often raise hue and cry for having one of the highest banking spread in the region - around eight percent. But, the fact is that the high-profile, cartelized banks that boast of having a lion's share in the banking industry profits are operating with a spread of 10 percent and even more. The 'also-ran' type medium and small-size banks are left with a spread of less than five percent. Where this cartelization of banks is going to take the nation and the economy?

The much-trumpeted success of Islamic banking, when viewed, in the background of a 7.1 percent 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 decent spread of three to four percent. Islam focuses on a non-material approach to life. Islamic banks' highly materialistic business operations are a shame.


Sri Lanka 5.1 Hong Kong 5.0 Malaysia 3.0
Bangladesh 6.4 Philippine 5.8 Kuwait 3.3
Pakistan 5.9 Qatar 2.8 Oman 3.3
Nepal 5.5 Bahrain 6.4 Japan 1.3
India(2010) 5.5 Jordan 4.3 S. Korea (2008) 1.3
Indonesia 5.2 Libya 3.5 Rep. Korea 2.2
Singapore 5.1 China 3.1 Iran (1.1)
Thailand 4.9 V'nam (2008) 3.1 Israel 2.6

As per the table, Pakistan is placed after Bangladesh and Bahrain, but the fact that the five major banks, forming core of our banking sector and operating with a spread of around eight percent puts us on the top of the list also 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 the 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 in How The Mighty fall 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 the 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. The private sector, anyway, has found answer to the squeeze it has been put under by the government and the central bank.

It has taken to shift to business-friendly countries. After drying-up of the foreign investment, the shifting private sector investment is yet another blow to the sinking economy.

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 and securities augur well for the banks operating in an already troubled economy?

The existence of a seemingly strong banking sector in a crumbling economy raises serious questions. Who is going to answer these questions? The banking sector is simultaneously at the second and third stages - the denial of risk and peril in the pursuit of more. While the fifth stage can time to appear, the fourth stage - grasping for salvation - is very much on the cards.