The SBP and the banking cartel- Dr Farrukh Saleem

The State Bank of Pakistan (SBP) is not doing its job right. Dr Shamshad Akhtar is not doing her job right. On December 18, 2006, Dr Akhtar, while addressing an international conference on ‘Fixed income market development in emerging market economies’, said: “Extraordinary banking spreads in Pakistan in recent years are an evidence of lack of competition and efficiency in Pakistan’s financial markets.”
In December 2006, the average lending rate of Pakistani banks was 11.10 per cent while the average return to depositors was a paltry 3.66 per cent; a banking spread of 7.44 per cent. In March 2008, the average lending rate was 11.26 per cent while the average return to depositors was 4.17 per cent; a banking spread of 7.09 per cent. If Dr Akhtar had found “evidence of lack of competition” in 2006 what has she done about it over the past 18 months? Not much, if anything at all.

Imagine; a depositor getting a rate of return of 4.17 per cent when the Federal Bureau of Statistics (FBS) says that the consumer price index stands at 10.27 per cent. In effect, Pakistani depositors are being paid a negative rate of return of 6.1 per cent. Pakistani banks have thus become an impediment to our economic growth — and the SBP remains a silent spectator. True, private banks are in business to make money and their managements are under obligation to maximize profits on behalf of their shareholders. Pakistani banks, however, lack competition, act as a cartel, strip depositors of their rightful returns and lend out deposits at rates that are not conducive to growth and employment. And, the SBP remains a silent spectator.

There is empirical evidence that an efficient banking sector accelerates economic growth in transition economies. There is evidence also that high spreads have a negative impact on growth and employment. In the Pakistani context, low deposit rates discourage savings. On top of that, an inefficient banking sector increases transaction costs and thus decreases the “share of savings channeled into productive investments.” Add to that, a seven per cent banking spread that decreases the productivity of investments.

According to the Competition Commission of Pakistan, Pakistani banks are “functioning like an organized cartel and are involved in fixation of spreads and interest rates on different products in consultation with each other and there is no competition among them, which is leading to anti-competitive behavior.” To be certain, forming a cartel is an offence under the Competition Ordinance, 2007.

Where in the world can banks make margins that are in excess of seven per cent? Comparing Pakistani rates with the rates in the developed world may be unfair but it can certainly provide a frame of reference. The average interest rate spread in Canada, for instance, is 1.3 per cent; the UK 2.3 per cent, Spain 2.4 per cent, the US 2.8 per cent, Australia 3 per cent and France 3.1 per cent. Of the 192 member-states of the UN there are two countries where banks make the most money — Columbia and Pakistan. No wonder every major global banking group wants to have its fingers in the Pakistani pie. I am sure, there are several reasons behind the high interest rate spreads in Pakistan but the principal reason that stands out is: lack of competition among banks.

High interest rate spreads are bad both for depositors and borrowers. Hidden within is an aspect of ‘wealth transference’ whereby wealth within the Pakistani society is being transferred from depositors to the banking sector and also from borrowers to the banking sector. Future looks promising but just for the banking sector. There’s an ongoing wave of mergers — that along with a mute SBP — is bound to encourage even more anti-competitive behavior.

Pakistan’s banking cartel is a classic case of ‘market failure’ whereby the “allocation of goods and services is not benefiting the society.” What we have is individual banks firmly in pursuit of maximizing profits at the cost of the society as a whole. What we have is a classic case of where a regulator must step in and bust the cartel. What we have is the State Bank of Pakistan that insists on remaining a silent spectator. Whose side is our regulator on — the banking cartel or the society?

PS: On July 20, Surapong Suebwonglee, Thailand’s finance minister, ordered state-controlled banks to “cut their interest rate spreads to no higher than two percentage points from the current four percentage points.” Honorable Mr Naveed Qamar, do you have any plans?

The writer is an Islamabad-based freelance columnist. Email:

Source: The News, 27/7/2008

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