Sep 26 - Oct 2, 20

While addressing the members of All Pakistan Textile Mills Association (APTMA), Mohammad Ali, Chairman Securities and Exchange Commission of Pakistan (SECP) has suggested banks should be confined to their core activities. Non-bank financial institutions (NBFIs) should be supported to compete with banks, he added.

One could only say that the realization has come very late and asking banks to mind their own businesses could yield more harm rather than creating entities, which can effectively compete with them.

To be honest, the commercial banks have become 'financial supermarkets', an idea initially floated by Muhammad Ali Khoja when he was chief of Pakistan's largest development finance institution Pakistan Industrial Credit & Investment Corporation (PICIC).

During his time, PICIC established itself as a commercial bank, an asset management company, and an insurance company. In fact, it was not his own idea but he just made the concept known to the whizz kids at that.

Earlier, some business groups had established commercial banks (in the pre-nationalization era) and also established 'captive' insurance companies. Since asset management business remained confined to public sector, two mega entities namely national investment trust (NIT) and investment corporation of Pakistan (ICP) were there. However, they were not competing with each other because NIT was managing open-end funds and ICP was operating close-end funds, besides providing medium to long-term project financing.

At the time of nationalization, only 'big five' banks were operating. With the issue of a dozen permissions to the private sector to establish commercial banks, a new era ensued. That culminated in privatization of allied bank limited (ABL), Muslim commercial bank (MCB), Habib bank limited (HBL), and united bank limited (UBL) and listing of national bank of Pakistan (NBP) on the local stock exchanges as well as its share floating to public.

At present, over two dozen commercial banks are listed at the three local bourses and less than a half a dozen foreign banks are operating in the country. DFIs, investment banks, and leasing companies have become endangered species, and are likely to become extinct in near future.

Obviously, the government and the apex regulator SECP are responsible for making commercial banks mammoth entities and resultant virtual bankruptcy of DFIs, investment banks, and leasing companies.

Most of these entities have become bankrupt because of SRO (statutory regulatory order) based lending, mounting non-performing loans, undertaking activities which were not part of their mandate, and mismanagement.

The entities facing virtual demise included NDFC (national development financial corporation), PICIC, ICP and IDBP (industrial development bank of Pakistan). As against this, the state bank of Pakistan (SBP) emerged a very stringent regulator and it is on record that none of the commercial banks has gone bankrupt since independence.

True, SBP behaved stubborn on various occasions, but this behavior was not out of context. With the government promoting deregulation, liberalization and privatization policies, private sector has not only established commercial banks and acquired domestic operations of a number of foreign banks but also embarked into insurance and asset management businesses.

The credit of keeping asset management companies financially strong goes to SECP alone, but the apex regulator has to concede its lack of capacity to oversee the performance of NBFIs.

Appropriate regulatory mechanism and timely decisions could have saved many of investment banks going virtually bankrupt and leasing companies accumulating huge losses.

While any attempt to revive investment banks can be termed an exercise in futility, the immediate focus of SECP should be on saving the leasing and insurance companies from becoming extinct.

One of the suggestions is that since commercial banks have poured in substantial investment in the insurance companies, the SBP should also be made responsible for regulating them.

Experts believe that neither SECP nor SBP should oversee operations and an autonomous entity Pakistan Insurance Regulatory Authority (PIRA) should be established. This suggestion draws logic from the fact that both the apex regulators do not have the expertise to monitor technical risk mitigation.

Similarly, since bulk of the leasing business now rests with the commercial banks, they should be asked to create separate commercial entities for undertaking leasing business. Since banks will have the majority stake in leasing companies, which will also be required to mobilize funds through issue of certificates of investment (CoI), it will be more appropriate that the central bank oversees/regulates leasing companies.

Banks also have major stake in AMCs, but since separate entities have been created for managing mutual funds, let this important segment remain under the control of SECP. The reason for making SECP the regulator for the AMCs is that small investors have parked huge money in mutual funds.

Advisably, the level of investment by the banks in the mutual funds needs to be restricted. The mutual funds should manage small savings. Institutions and high net worth investors have several investment options.

If the SECP is serious in confining the role of banks to their core activities, it should help in creating entities, which can provide medium and long-term investments.

Providing medium and long-term funds is not the responsibility of commercial banks. The record also shows that over 90 per cent deposits of commercials banks are of less than one-year maturity.

The real issue is that now banks are investing in government securities and hardly lending any amount to the private sector. Similarly, micro-financing and lending to small and medium sized companies and agriculture sector are still low.

If the government is serious in accelerating GDP growth rate and achieving food security, lending to farmers has to be increased. Since agriculture is exposed to natural calamities, floods and drought, introduction of comprehensive crop insurance can minimize the risk of farmers as well as the financial institutions. Introduction of comprehensive crop insurance is not possible without active participation of the government. The scheme submitted by the insurance companies is awaiting approbation by the central bank.