The State Bank of Pakistan (SBP) has responded to several complaints made by depositors with the issue of a directive to all banks and development finance institutions (DFIs) to clearly stipulate the annual rate of return on all their products that are advertised in the print or electronic media.
There is no doubt that most of the deposits in Pakistan are owned by the ordinary households, which actively seek to maximise their profits by parking their money in lucrative schemes launched by the banks.
However, it is the SBP's responsibility to ensure that the public is protected from deliberate and malafide misrepresentation in the media, and this is possible only if the SBP performs its regulatory and supervisory role through strict enforcement of prudential regulations. Hence the SBP's directive to banks and DFIs to ensure that all advertisements must provide pertinent information to enable the clients to adequately assess the true merits of any financial product and compare it with others available in the market.
However, misrepresenting the actual rate of return is the outcome of a certain inherent problems. There is a keen competition in the banking industry and the banks making dubious claims are seldom asked to account for their promises. Also, the rate of return in Pakistan has generally remained negative for over three decades, which induces depositors to look for more lucrative avenues of investment.
This explains the success of several financial scams in the country whereby gullible people desperate to realise a positive rate of return on their hard earned savings get involved in schemes that are destined to fail. In addition, there is ample evidence that the informal sector continues to lend to the poor at exorbitant rates.
Ordinary people were also lured to borrow on easier terms through consumer financing schemes by banks but now have to pay higher rates, though they were not explicitly told about this at the time of the contract. Owners/directors of the private and public companies are sometimes asked to furnish personal guarantees unnecessarily and without reason. All these issues need to be looked into by the SBP.
Another issue that the SBP must deal with is the rising inflation. In our view, there is definitely a need to follow a contractionary monetary policy to subdue inflationary pressures in the economy. Although the State Bank is authorised under the revised Act to undertake contractionary measure at its own but the perception is growing that its hands are tied due to the pressure of the government to finance its budget deficit through bank borrowings, ease its debt servicing liability and help improve growth prospects of the economy. The State Bank needs to exercise autonomy as enshrined in the Act and dispel such an impression.
The main function of any central bank is to control inflation while other considerations are only secondary. It is fortunate that most of the State Bank Governors, including Ishrat Hussain, have done reasonably well and argued forcefully with the Ministry of Finance if there was undue outside interference in its affairs. One would hope that the government would maintain the tradition of appointing a professional of high calibre and integrity as the next Governor at the time of the expiry of the tenure of the present incumbent in December 2005.
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