ISLAMABAD, 3 November 2003 — The central bank has set new sails for the Pakistani banks as their ownership shifts to private hands and competition grows.

State Bank of Pakistan (SBP), the central bank has announced a new set of Prudential Regulations (PRs) that will govern banking and investment. The rules will apply to all the banks and financial institutions, effective Jan. 1, 2004. SBP has put in place three separate sets of rules. These are for corporate and commercial banks, small and medium sector banks and consumer finance. PRs will apply to all Pakistani, foreign-based, private, presently or formerly state-owned banks, and Non-Banking Financial Companies (NBFC).

The new PRs aim helping build the capacity of the banks and financial institutions in preparation for adopting Basel-11, the international banking accord. The new PRs cover four areas: Risk management, corporate governance, know your customer and anti-money laundering and operations.

Tawfiq A. Husain, deputy governor of SBP, announcing the new PRs said, “the central bank will gradually withdraw these regulations as banks and non-banking financial companies (NBFCs) will be encouraged toward self-regulation. It will leave the central bank to maintain only risk management guidelines, enforced recently.” SBP, in 1992, had first enforced corporate regulations at a time when most of the Pakistani banks were state-owned. The regulations covered wholesale or commercial banking. The central bank is currently working with banks and their external auditors for upgrading the quality of information provided to the customers, general public and various stakeholders. Inspite of the lending rate of the banks generally declining to 4.0 percent, or even less, for big blue corporate borrowers because the banks continue to be aflush with liquidity, medium entrepreneurs and poorer sections of the society still have to pay a high rates.

While the small and medium entrepreneurs complain that they cannot find credit at less than 9 to 12 percent, the poorer sections may have to pay as high a rate as 18 percent which is the case with the Khushhali Bank. This bank, supposed to operate on the lines of Grameen Bank of Bangladesh, was created for the very poor but it has failed to deliver. Its management claims, it is charging that high a lending rate because it lends without a collateral, thereby assuming higher risk. SBP, though claiming to be mindful of the needs of SMEs and the poor, has no real solution to arrange and deliver credit, at affordable lending rates, to these categories.

Similarly, the interest charged on consumer financing is quite high — 9.0 percent and above. This is despite the fact that the SBP and the commercial banks were forced to go into consumer financing as there were hardly any takers from industry and big business while the banks had piles of liquidity. “Market forces will determine the rate of interest on consumer financing and SMEs,” Husain says. He also says, “with the enforcement of PRs for SMEs, the extent and level of credit availability to this category of borrowers will substantially increase in the coming months.” But passing the buck like this has, so far, failed to help these categories of borrowers whose needs are genuine and the potential demand and volume very high. In fact these are the very sectors that has kept the economy afloat quite a bit for years while big industry has remained stagnant and no significant investment has been made in new units since mid-1990s.

“Aflush with liquidity and hardly anyone in industry and business to borrow, the banks have been heavily buying stocks and shares on their own account, as well as financing brokers and investors to buy shares. Among others, this is one of the reasons for the stock market continuously rising,” says Moin M. Fudda, managing director of the Karachi Stock Exchange (KS).

Fudda has very ably handled the affairs of the KSE since he took over this job. His farsight, candidness and deep insight into the capital market and the stocks has earned him great respect among all stakeholders. But, financial analysts were of the view that some bankers, investors and outright speculators were putting large sums of money into speculatively, as well as in second and third tier scrips, and even dormant shares.