Addressing banking professionals at the 55th Annual General Meeting of the Institute of Bankers of Pakistan (IBP) on 17th September, the State Bank Governor, recounted the achievements of the banking industry in the last few years and elaborated his vision of the culture, values and ethics in the country's banking sector in future.
The banking system in the past, according to Governor Ishrat Hussain, "was dysfunctional and instead of making contribution to the real economy it was acting as a drain". After untiring efforts, it has come a long way from the bad old days of pre-1997 period and has now become sound, strong and healthy.
"It would no longer be an exaggeration but a fair statement that the landscape of the banking system has changed dramatically". The ownership and management have largely been shifted from the public sector to the private sector and all financial soundness indicators are now robust and can be favourably compared with international benchmarks.
Capital adequacy ratios are now much better, the level of non-performing loans has declined, lending to agriculture and SMEs has increased, technology upgradation has been undertaken on a large scale and profitability of the banking industry has risen sharply. The Governor, however, stressed that the benefit of sound banking system should be shared widely across various income groups, regions, sectors and sizes of businesses and he was unhappy that the depositors had not received a better deal in the last few years.
In order to sustain the pace of progress, the culture, values and the ethics of the banking profession need to be changed in a fundamental way. Ostentatious life styles of bankers do not go unnoticed and callous and irresponsible actions by even a few bankers could cause damage and bring a bad name to the entire banking profession.
There could be dazzling temptations but these have to be avoided at all costs. "It is with great difficulty that we have got the banks privatised but, please, do not commit such actions that will provide ammunition to the detractors of privatisation". The Governor also urged the bankers to keep away from the culture of sifarish, reciprocity, favouritism, nepotism and imbibe a culture of serving the customers equally and decently without any distinction. For bringing about cultural change, it was essential that responsibility should be accepted squarely and the blame game should be stopped.
Integrity was the highest value to be practised by the banking professionals without any semblance or shade of compromise. "Rewards and recognition to the staff and penalties should be closely linked not only to their performance but also to their contribution in bringing the desired cultural change, behaviour modification, attitudinal change, upholding and exhibiting core values and ethical standards".
The Governor also called upon the Pakistan Banks Association to develop a code of conduct for all the bankers in the country and have an oversight committee that should enjoy the powers to take to task those who are found guilty of violations of the Code, irrespective of their status and standing. Such an enforcement mechanism would help in the upgradation of ethical standards across the industry.
We feel that there cannot be any disagreement on the Governor's observations in his address at the Institute of Bankers. Historically, various governors of the State Bank have been talking on issues in the annual meetings of IBP, which are closer to their heart. There is absolutely no doubt that banking industry in Pakistan has made a lot of progress during the last six years or so and, thankfully, it is now much more healthy and dynamic to meet the multifaceted requirements of the economy.
In this respect, it needs to be remembered that most of the banks would have been closer to insolvency by now if the deteriorating trend of previous years had been allowed to persist. However, it also needs to be mentioned that credit for this turnaround cannot be entirely claimed by the State Bank. To a large extent, it was government's efforts which, directly or indirectly, contributed to the improvement in banking industry.
Privatisation or nationalisation of any industry is always a political decision made by the government. During the last six years, the Army has been incharge of this country and under this dispensation it is always much easier to convince the government of the need to allow organisations like the State Bank to take correct measures. The role of NAB in reducing the level of NPLs and keeping the unscrupulous borrowers away from the bankers cannot also be underestimated. Besides, it must be cordially stated that everything is still not hunky-dory in the banking industry.
The Governor himself has acknowledged that depositors are getting a raw deal. This has undermined the public sentiment to save or forced the savers to invest in speculative avenues, which is not in the long-term interest of the economy. Service charges of the banks are high and most of the bank branches still refuse to accept utility bills on one pretext or the other despite clear instructions of the State Bank. After privatisation the behaviour of banks has become generally more elitist and their treatment of small depositors is generally more discouraging.
So far as improvement in ethical standards and cultural values in the banking industry is concerned, it is easier said than done. Bankers, like anybody else in the society, face the same temptations and pressures. We wholeheartedly support the hopes of the Governor but these would remain a vision only until other sections of the society, particularly government officials, give the lead or at least play an active role in reforming themselves and serving the people. On all counts, it appears to be a long-term goal.
In the meantime, it would be better for the State Bank to concentrate its efforts on reducing the current rate of inflation in the economy, which is its primary concern. The remarks of the Governor on industrial families and big business taking over the reins of banks and the possibility of their exercising pressure on the management, are valid, but this would be perhaps a necessary cost to be paid for privatisation.
There could be, of course, many arguments on both sides of the issue, but greater responsibility, in any case, will be with the State Bank to ensure that major shareholders are not allowed to misuse their powerful positions for their own benefit or that of families and friends. After all, their share in the banks' assets is only 8 percent while 92 percent is ordinary depositors' money. The regulator is duty bound to protect depositors' interest.
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