A crisis manipulated- Ikram Sehgal

When customers lose confidence in a bank and withdraw their deposits hurriedly, it is called a “run,” Which very few banks can survive. In the present economic circumstances the “run” on one of our banks should have been expected some time, when it did come it was a complete surprise. The surprise was on many counts, not the least how unprepared the State Bank and the government were in coping with the problem. To their credit, when they realised the enormity of the impending crisis they did react strongly, better late than never!

During the later part of last week SMS messages from nowhere started circulating that some of the banks were about to go bankrupt. They targeted foreign banks, specifically Bank Alfalah. The rumours panicked foreign-currency account holders, they lined up in droves to take out their deposits from some branches. This was force-multiplied by the rumours circulating for some time that the government was about to seize bank lockers, As cars backed up outside bank branches, customers having local currency deposits also made long queues. Bank branches do not carry large amounts of cash, there is always a time lag in paying out heavy withdrawals over the cash counters. This added to the panic, telephone calls flashed across the country that Bank Alfalah had gone bankrupt.

The attackers went for the wrong target. The fundamentals of Bank Alfalah are strong, with double the required capital and very little portfolio that is affected. There are adequate cash reserves on hand. Moreover, bank machinery throughout the country was functioning smoothly. Friday was a critical day. Extra cash was dispatched to main branches to ensure that no bank customer was kept waiting for cash. The media had picked up (and in some cases embellished) the rumours, and it was necessary to tackle the media head-on. Bashir Tahir, the CEO of the Dhabi Group, which has a majority shareholding in Bank Alfalah, flew into Islamabad from Abu Dhabi by special aircraft on Friday evening. He spelt out the facts as they were. Dhabi Group has $10 billion in investments in Pakistan, the single-largest investor in the country. With major interests also in the telecom industry, real-estate, power and other sectors.

In a live interview on Geo TV Shaikh Nayhan bin Mubarak al Nayhan minced no words in expressing how confident he was about his investments in Pakistan, and even given the bleak world economic situation he was planning to invest more heavily in Pakistan, both out of love for the country and because of his confidence in the resilience of Pakistan’s economy. This was a much needed shot in the arm, not only for the bank but for Pakistan. The results of the tremendous fight back were apparent on Saturday morning. The cash counters saw inflow far greater than the outflow, even payment through cheques presented through the banking system was less than the cheques deposited, a dramatic turnover. Many large depositors rang up to register their confidence in the bank.

While other banks, all with foreign ownership, were also targeted, Bank Alfalah faced the most serious, concerted attack. If there is a “run” on any bank in the world, it can collapse. However, the banking system in Pakistan is strong because the balance sheet were “cleaned up” over the past decade, there are no sub-prime mortgages or the paper derivatives that are affecting US and European banks. However strong Bank Alfalah is, and one believes it is the strongest in the Pakistani banking system. It could have collapsed if the attack had been more concentrated and the reaction of the Bank rank and file had not been spontaneous and across the board. It was a full-fledged counter-offensive.

As far back as in the early 1800s, US president Andrew Jackson said: “banks are more dangerous than standing armies.” Even through I can hardly qualify as an economist my short experience as a director has given me some knowledge to know when a full-blown economic disaster is staring the country in the face. Speaking to both government and public sector officials on Friday, the day of real reckoning, one found them sympathetic but not alarmed. They did not seem to realise the extreme gravity of the situation. If, God forbid, one bank would have fallen, the domino effect would have affected a number of banks, thereby creating an economic crisis of horrendous economic proportions in Pakistan. If our banking system even partially collapsed, the salary payment mechanism would be affected, thereby creating a massive human crisis. With people without cash unable to purchase their daily necessities, street protests would have led to anarchy. The lack of concern among some responsible people was appalling. One puts it down to ignorance rather than callousness. On the other hand, when the seriousness of the situation was explained, many did react positively.

One has a fair idea from where this crisis emanated. Without hard evidence it would be unfair to blame them for their selfish greed that almost undid our economic system. This averted crisis does need full-fledged forensic investigation, the attempted economic terrorism was intended to make the recent spate of terrorist bombings pale in comparison. This economic sabotage was meant to destroy Pakistan economically!

The writer is a director of Bank Alfalah. Email: isehgal@pathfinder9.com

The News, Tuesday, October 14, 2008


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