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PAKISTAN’S BANKING SECTOR: Rate of returns and deposits

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The banks have now been paying higher rate of returns on deposits of larger amounts, meaning, thereby that bigger the amount of deposits — higher the rate of return. This has to some extent increased the average rate of return on deposits but the real beneficiaries have been big depositors while small depositors continue to suffer. It is unfortunately a fact that banks are discouraging small depositors with the result that the total number of accounts of Rs10,000/- or less with scheduled banks in Pakistan which were 14.4 million on June 30, 1999 were reduced to only 9.3 million on June 30, 2004 showing a fall of 5.1 million accounts. This should be a matter of concern to the policy makers particularly SBP. As no remedial measure was taken, total number of bank accounts was further reduced to 7.8 million on June 30, 2007.


Governor of SBP on August 31, 2002, said:

‘The government has already reduced the tax rate from 55 per cent to 47 per cent during the last two years and it is envisaged that the rate will be reduced gradually and brought at par with the corporate tax rate of 35 per cent in the next three years. This will in turn help in reducing the spread between the deposit rate and lending rate and benefit financial savers.’

While depositors of banks continue to suffer, government and SBP have been giving concessions and incentives to banks to boost their profitability. The tax rates have however been persistently reduced but instead of fulfilling the promise of giving benefits to financial savers and reducing the spreads, real rate of returns to depositors have been further reduced and the high spreads have been allowed to continue. This is yet another example where State functionaries, through their various policies, have been directly or indirectly passing on benefits to the powerful segments of society at the cost of national economy and the common man including depositors of banks. It therefore, looks surprising that SBP is now not only assisting the banks in exploiting the depositors by allowing them to pay the rate of returns which are lower than the inflation rate but is also appreciating the performance of the banks. The SBP, a few months ago, has directed banks to pay a minimum rate of return of 5 per cent per annum to their saving bank account holders whereas the rate of inflation in the country is about 25 per cent. The real negative rate or return is accordingly highest in the history of Pakistan.

We have all along been criticising the policy of lowering interest rates and over seven and a half years ago in an article under the caption ‘Policy of lowering interest rates not in harmony with ground realities’, published in The News International, (Karachi) on February 26, 2001 said, ‘The present government has persisted with the policy of lowering the interest rates. This is having an over all negative impact on the economy’. While observing that the banks by lowering rates of return on deposits are discouraging savings in the country, it was suggested that ‘The policy of lowering interest rates needs revision’. This suggestion was subsequently repeated over a dozen times during last six years.

Had these submissions been given serious considerations by successive governments and the SBP, the present economic crises in the country could have been averted. It was however, after six years of our above warning that Dr. Shamshad Akhtar, Governor SBP conceded that the artificially lowered interest rates has negative impact on the economy and that the country is still paying the price of this policy. We may now add that some of the present SBP policies are also wrong, the price of which is being paid now and would also continue to be paid in the coming years.

The Governor SBP in 1993 observed: ‘The first pre-requisite of an efficient banking system should be to provide a positive real rate of return to savers’. It is unfortunately a fact that SBP has now not only been watching the transfer of resources from the poor to the rich but as the central bank, it has also been directly contributing to this process including by encouraging large-scale write-off of stuck-up advances of banks/ DFI’s at an accelerated pace. It is a matter of concern that after the share of foreigners in Pakistani banking sector increased due to sale of two major banks under the banner of privatisation, the banks formed a cartel and have been exploiting depositors in a big way. The banks paid to depositors a positive real rate of return of 2.97 per cent per annum in year 2000. A major government — owned bank namely United Bank was privatised and sold to foreigners in 2000. The banks in that year reduced their positive real rate of return to 0.91 per cent per annum. Another major bank namely Habib Bank was sold to foreigners in year 2004 and the banks paid to their depositors a negative real rate of return of 3.30 per cent per annum in that year. The negative average real rates of returns being paid by banks are now highest in the history of Pakistan.

The Governor SBP in March 2007 said that a key element of the structural change in the banking sector is ‘Free and flexible entry of foreign banks raising foreign shareholding to almost half of the banking sector assets.’ It is important to note that the share of foreign banks’ deposits in the total deposits of the banking sector in 1992 was only 14 per cent but the share of deposits of banks with significant foreign stake has now increased to about 60 per cent.

This reminds us of the era of East India Company. We are witnessing the re-colonisation of the State of Pakistan due to the policies of ‘Viceroy and financial Viceroys’. Dr. Hasan-uz-Zaman, in his book ‘Islam and Business Ethics’, while observing that abundance of multi-national corporations is regarded as a stratagem to pave the way for economic imperialism by the industrialised nations, says:

‘The government was warned (referring to the author) to be careful in transferring the privatised industrial and financial institutions to foreign investors because they might emerge as a new East India Company.’

It was in 1997 that we had cautioned the government by saying:

‘— it would not be prudent to sell the public sector banks to foreigners. If these banks are sold to foreigners, banks controlled by foreigners, including existing foreign banks, will emerge as most powerful tycoons’.

Due to low interest rates and soft monetary stance, the tendency of diverting the proceeds of bank loans availed for trade, industry and exports has been witnessed. This mis-utilisation in collusion with bankers, in some cases, has been done for undertaking speculative activities in stocks, real estate markets, investment in National Saving Schemes and hoarding of wheat and sugar etc. SBP failed to take effective action against these banks. Some of the banks’ executives were also involved in speculative activities in their personal capacity for wrongful personal gains.

— To be continued

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