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PAKISTAN’S
BANKING SECTOR
Stock market, profits and speculative business
By Dr Shahid Hasan Siddiqui
This article is based
on research, analysis and annual reports and conclusions
have been drawn based on factual data. There is no
conscious attempt to either single out or target any
specific bank. The section being produced here is part 3
of 5 parts; the remaining parts will appear one by one in
consecutive weeks in the Business and Finance issue. —
Editor
This article is based on
research, analysis and annual reports of banks and
conclusions have been drawn based on factual data. There
is no conscious attempt to either single out or target any
specific bank. The section being produced here is part-3
of 5 parts; the remaining parts will appear one by one in
consecutive weeks in the Business and Finance issue.
The profit margin in stock market
businesses has been very high and that too tax-free,
hence, many industrialists were tempted to divert their
activities from industrial production and export business
to speculative business. This is confirmed from the fact
that the large scale manufacturing (LSM) which had
recorded a growth of 19.9 per cent in FY05 declined to
3.67 per cent in FY08. The market capitalisation of
Karachi Stock Exchange (KSE) 100 index which stood at
Rs2068 billion at the end of FY05 rose to Rs4329 billion
on 14.05.2008 - highest rise in Pakistan’s history. All
this is simply a manifestation of managing the economy
based on casino culture. The banks by allowing diversion
of industrial loans etc., to speculative activities have
therefore, contributed to low production, high trade
deficit, enhanced poverty and un-employment and widening
of the gulf between the rich and the poor.
The March 2005 stock exchange scandal
was also due to banks’ involvement.
“The Ministry of Finance, State Bank
of Pakistan, some big brokers, few commercial banks and
investment banks, DFIs, and senior bank executives in
their personal capacity, privatisation commission, some
politicians, industrialists, feudals and chairman of ERRA
working hand in glove while engineering the March 2005
crash.” (The News International, November 28, 2006)
After about 18 months of the above statement, a former
investment banker of Pakistani origin was sentenced to ten
years in prison for stealing inside information and
providing the same to an alleged accomplice ñ a banker
working in a bank in Pakistan owned by foreigners who made
$7.8 million (Rs480 million) as illegal profit by trading
in stock market in United States.
It is unfortunate that the system in Pakistan has
failed to apprehend such culprits who even while serving
in banks remain involved inside trading in the stock
market in collusion with some big stock brokers.
Banks have also been allowing advances
at concessional rates of interest for exports purposes
but, in some cases, these loans have not been utilised
properly and banks have failed to check diversion of these
funds. The Governor of SBP, in November 2002 said:
“The periods of low and subsidised
rates have led to an expansion in the demand for export
refinance but a reduction in the volume of exports.
Subsidised rates, in the past have given rise to a lot of
misuse and misallocation of resources. The arbitrage
between the subsidised rate and the market rates has
created distortions in the financial system in terms of
artificial deposits, spurious collaterals and bad loans
taken on the strength of those collaterals.”
After about five and a half years of
the above observation, SBP in its annual report for
2006-07 concedes:
“The
availability of concessional finance on exports is also an
incentive to over-invoice the value of exports so as to
obtain large funds at subsidised rates which can then be
invested in other high return avenues such as real estate,
stock market or even the national savings.” It is
important to note that the exports of Pakistan recorded a
rise of $7800 million between FY02 and FY07. According to
information provided in the SBP report referred to above,
it appears that during FY02 and FY06, the total quantum of
over-invoicing was to the order of about $5500 million.
The actual rise in exports during these years would
therefore, be only about $2300 million. It is therefore,
worrying that during last seven years the total
concessions etc., provided to exporters were to the order
of about Rs465 billion without any real success. The cost
of these huge concessions has been borne by the common
man.
The Governor SBP Dr. Shamshad Akhtar
between April 2006 and June 2006 repeatedly asserted that
the ‘report refinance rate’ will not be reduced. While
ruling out reduction in export refinance rate, she said:-
“The government can not subsidise
loans any more as the refinance scheme in the past has
been misused and subsidised funds have been channelled in
speculative activities.” It is surprising to note that
instead of taking action against the concerned banks and
the exporters, governor Shamshad announced on July 14,
2006 that rate under the ‘export finance scheme’ has
been reduced and the exporters can borrow at 7.5 per cent
instead of 9 per cent earlier. This reduction amounts to
encouraging over-invoicing in exports, the failure of
proper utilisation of bank’ funds and the promoting of a
casino culture in the stock market. The existing crisis in
Pakistan’s stock markets is however, mainly due to past
unprofessional activities and has not much to do with the
recent turmoil in the financial and stock markets in US,
Europe and in some Asian countries.
The following statements show that:
(a) Number of people per bank branch
is already very high in Pakistan as compared to other
regional countries (Table-D). It is therefore, beyond
comprehension that a large number of branches have been
closed by major banks during last ten years or so. (b) The
financial penetration particularly in rural areas is also
very low in Pakistan (Table-E). It is significant note
that the foreign banks ñ both interest-based and Islamic
banks have not opened even a single branch in the rural
areas to cater to the needs of small farmers as also of
millions of people belonging to low income group. The
following is the position of the branches of banks (Table
F):
A perusal of the following outstanding
advances as on December 31, 2006 shows that the loaning
policies of the banks have been detrimental to the economy
as well as to the socio-economic objectives.
1.
Agriculture
Rs 141.8 billion
2.
Consumer finance
Rs 276.0 billion
3.
Micro-finance loans
Rs 10.7
billion
The bankers surely understand that
consumer financing in such a big way balloons the trade
deficit due to higher imports of automobiles, electrical
appliances, mobile phones and oil whereas micro-finance
loans contribute towards alleviation of poverty and
reducing rate of unemployment. The allocation of low
priority to micro-finance is therefore, not understood. It
is also painful to note that banks particularly banks with
significant foreign stake, knowing fully well that trade
deficits and the current account deficits have been
increasing since FY05, continued liberal financing under
consumer finance scheme. The trade deficit and the current
account deficit have now attained an all time high level
and is a matter of serious concern.
The negative impact of consumption-led
growth, imprudent loaning policies of banks, policy of
lowering interest-rates, improper utilisation of banks’
advances, over-involvement of banks and bankers in stocks
market, payment of negative real rates of returns to
depositors, policies based on casino culture, speculative
culture, and hoarding culture and poor quality worrisome
foreign investments etc., have contributed to the
deterioration of the macro-economic indicators during last
five years.
Pakistan’s economy is in serious
crisis mainly due to imprudent policies pursued during
last nine years. The persistent high and rising inflation,
unsustainable fiscal and current account deficits,
declining GDP growth rates, falling foreign exchange
reserves and the dollar-rupee parity,
rise in domestic and external debts at an
accelerated pace, low and declining rate of national
savings and high savings-investment gap etc., are posing
serious risks and challenges to the economy. It is
unfortunately a fact that in addition to external factors
and imprudent economic policies of the successive
governments, the policies of SBP and banks and rampant
corruption, both financial and intellectual at all levels
in the country, have also contributed to these negative
trends in the economy.
— To be continued
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