Picture this: I am a practicing lawyer and a regular tax payer. Having said that, the travesty is that I cannot even get a credit card for myself, let alone, a financing facility from any bank in the country. Why? Because I’m a lawyer and now associated with politics, I’m in a black-listed category. There are numerous other individuals who have to face the same difficulty when it comes to availing any finance facility.
Why do I have to share this with the readers? Because, in a recently published “Bank Credit to Private Sector: A Critical Review in the Context of Financial Sector Reforms”, issued by staff at SBP’s Economic Policy Review Department, there is damning acceptance that credit growth has lagged GDP growth. From 25% Credit to GDP ratio in the 1980’s, we have reached to 16% in the current period of 2011-2015. For any economy to grow and any society to show semblance of ‘equal opportunity’ afforded to its populace, access to credit is a fundamental pillar on which a society and an economy stands. An entrepreneur taps the capital for his growth while consumers depend upon loans to aid in their upward mobility in society, which basically means acquiring property on mortgage or a car loan in simple terms. Pakistan has historically been blessed by a well-organised banking sector with good human capital aiding in the growth of financial sector manifold. The State Bank’s Prudential Regulations have been successful in barring deliberate attempts to defraud the banking system, and the banks have remained afloat on their own with little support by the State.
Ever since the 1980’s with the banking sector under the state control, banks and their ability to finance became a perfect bargaining tool for the powers-that-be. Loans were given out as if it was a birth right to a select few against getting political loyalty. Those loans were used to acquire assets and siphon funds abroad. Those funds were used to acquire properties in prime locations and establish businesses, which have benefitted from the steep depreciation of Pakistani Rupee. The loans were not repaid and instead willful defaults became the order of the day. Of course, these well connected businessmen also abused the legal system to default and over a period of time, returned only the principal loan back, getting the interest on those loans written off. Basically, their wealth and affluence was largely financed by bank money, while in return banks like MCB, ABL, UBL and HBL had to be privatised on the pretext of losses.
The global financial crisis took a toll on the Pakistani banking sector, but that was after a period of superb growth in which private credit grew at a rapid pace between 2004 and 2008 fueled by both consumer finance and corporate credit. The banks were also able to benefit from a soaring capital market which allowed them to focus on the consumer business. But as all good things have to come to a halt, the financial crisis in Pakistan was more profound as FDI dried up, the government’s ability to raise foreign debt diminished because of all the political noise in the country, interest rates touched as high as 14% and consolidation in the banking sector forced smaller banks to merge and handle their bad loans. With the country fighting a war on terror, and high interest rates causing banks to become more risk averse, they chose to finance mainly the state’s budgetary requirement. For just 3% of GDP being borrowed for its budget deficit from banks in FY2008, the figure touched 20% of GDP in 2016.
Imagine, if you are the management of the bank, why would you like to take risk when you have the state borrowing endlessly from you and it helps you manage your books in an easy manner. Conversely, the result has been very depressing for small businesses or enterprises which could not take off or sustain themselves due to lack of liquidity caused by banks focusing on easy lending to the Government sector rather than small businessmen who may have brilliant ideas but not the financial prowess to fund their business. To make things, such people constitute majority of our population. Our banks need to get out of their complacency mode and facilitate such entrepreneurs. Having said that, I am not oblivious to the concerns of banks, therefore, we need to strengthen our laws in cases of bank default. This will ensure expedited recovery. For example, in UAE, majority of such loans are backed by way of post-dated cheques, in case of default, all that the bank needs to do is to present the cheque and then, law takes it course at tremendous speed. The result is UAE has become a commercial hub for international businesses. I may add here the importance of proactive regulators, which is unfortunately nowhere to be seen in our country. There is no doubt in my mind that the regulators have to act in a strict manner, but they should also serve to facilitate business enterprise so that the economy flourishes benefitting the entire population.
Another result of the financial crisis and its aftermath was that the corporates started avoiding the banking sector for capital. The stock exchanges became a major tool for raising money for good companies through IPOs and Rights issuances. Read any prospectus of any new company being listed on the PSX in the last five years, and you will find that all of them had one common theme: they raised equity to repay bank financing. Isn’t that an egg on the face of our banking sector that entrepreneur is willing to pay a higher return on equity to investors than to banks, just to ensure peace of mind and unnecessary regulatory requirements.
Now that a major precedence has been set on corruption with the removal of a sitting Prime Minister, in my opinion, there is a need for all the political stakeholders to agree on a major point which everyone seems to ignore: ensure access to capital for the population through the banking sector and end use of bank finance as a tool to bargain with opponents or control businesses. That is one way, we can ensure that the society grows in a proper manner. Banks should lend seeing the security and the ability of the borrower to pay back, rather than controlling funds and using them to finance a select few. This can be one way of ensuring equitable distribution of wealth amongst all strata of our society which will, in turn, establish an egalitarian society as envisaged by Quaid-e-Azam Muhammad Ali Jinnah.
The writer is a member of the Senate of Pakistan
Published in Daily Times, December 9th 2017.
