Abu Saeed A. Islahi

Though in a global prospective size of Pakistan’s banking industry is relatively small; it amply mirrors earlier cited global phenomena with its own domestic dimensions. Pakistani banks, for instance have yet to establish among its stakeholders a balanced risk reward relationship.  Regulatory apparatus supervising their governance is currently perfunctory in discipline and is unable and perhaps unwilling to arrest the alarming rise of bad debts that erupt out each year from banks’ accounts. Consequently banking industry is in a state of serious decline and it is well reflected in its stock’s valuation.

In 1947, on its Independence, Pakistan inherited a mere patch work of banking infrastructure and that too was at the verge of collapse because of grievous deficiencies of skills and resources. Hindus, Sikhs, Parsees and others along with their owner-managers running banks in its boundaries hurriedly exited. Thus, banks were rendered dysfunctional instantly. For the same reasons, Pakistan was not able to set up a central banking apparatus of its own and remainder of its banks were regulated by the Reserve Bank of India (RBI) almost for a year till the formation of the State Bank of Pakistan (SBP) in July 1948.

However, despite above odds, in a spirit of fight back and of accepting serious economic challenges, banking industry in no time overcame its major operational hurdles in a short span of time. Under the impetus of surging markets coupled with the zest of a young nation fighting for its survival, a vibrant banking sector sprouted in less than a decade in the country. A great deal was facilitated, in this respect, with the migration of two major banks; one from Bombay (HBL) and another one from Calcutta (MCB) and incorporation of first public sector bank (NBP) in 1949. Also several new banks sprouted all over the country in coming decades and Karachi emerged as nation’s banking hub.

Notwithstanding this optimistic scenario, embedded problems of human and financial deficiencies continued to nag domestic banks. Their fast track growth added even a few more in coming decades.

Since Pakistan’s military takeover in 1958, during its first decade, growth of banking industry accelerated in all its financial dimensions and its network expanded quite rapidly, particularly, in sprawling urban centres of the country. But banks continued to suffer from liquidity constraints that impeded their growth in domestic credit markets. Mobilisation of deposits was a daunting task in a tenuous banking environment of the country and banks were greatly hindered in their endeavours due to acute shortage of experienced staff and inadequate network, particularly, in rural centres where bulk of economic activities were taking place. Banks were not up to the task of developing a poor agrarian economy passing through early stages of its rehabilitation and monetization of its non-cash assets. The apex bank (SBP) too was in an embryonic stage then; fragile to offer any meaningful assistance in this direction.

Hence, deposit markets were open to great exploitation; taking full advantage of them some unscrupulous bankers; running shoddily structured and dubiously financed banking companies took strategic advantage of this insalubrious situation. A frantic internecine deposit war exploded among several banks that quickly degenerated into an ignominious strife for their survival. In this rage of deposit touting, several banks resorted to immoral corrupt practices of loaning to non-creditworthy individuals with built-in elements of kickbacks and other pecuniary benefits. Some banks even recruited depositors’ progenies with little regard to any need or merit. A morbid culture of deposit-touting permeated in the corps of industry. Banks in its blight inducted a large number of poorly groomed cowboy managers who thrived on quick encashment of their contacts without much proficiency in banking. In consequence, banks lost their visage in the eyes of the general public. Their credit, confidence and probity were damaged irreparably in the process.

The blight was on the credit side of banks too. Before partition, Indian economy suffered from a state of permanent credit crunch. Prior to 1806 when the British established the Bank of Calcutta as their treasury cum commercial bank in support of their raj, a bank was a total stranger to the Sub-Continent. Hitherto, Indian society had met most of its credit requirements from friends and relations or from its local “Shylocks” who provided loans to desperately needy on exploitative usurious rates. Indian banks despite great strides made since then remained an exclusive domain of a privileged class. In new state of Pakistan, this situation got even worse. Business houses in its commercial and industrial sectors furiously vied for a meagre pie of bank loans. State of Pakistan too was in desperate need for funds for its requirements arising out of the Partition in its gigantic task of rehabilitation and restoration.

This required a sector-wise prioritisation of credit distribution among its several strong contenders. The apex bank was the natural arbiter in the matter, but, SBP’s leadership role turned out to be conspicuously minimal. It lacked will as well as requisite capacity for such an exercise. Thus, an impression emerged all around that SBP was merely an appendage to the Ministry of Finance (MOF) that dictated country’s monetary policy as well. Devoid of its policy role; its patchy regulatory apparatus, it was woefully insufficient to enforce any tangible credit discipline among banks.

Thus several problems related to credit immediately surfaced. First, there was hardly any flow of loans to agriculture and rural sectors. Second, a lion’s share of credit was quickly swallowed by “insiders” in banks and “outsiders” were left in the cold. Banks even in their preferred commerce and trade sectors were lukewarm to go beyond their inner circles. Third, in an obvious conflict of interest, some banks were lending to their own enterprises with impunity. This exposed banks to speculative perilous investments that were ab initio not bankable in the first instance. Therefore, as a custodian of public moneys banks’ conduct was not in line with sound banking practices both on legal as well as moral grounds.