Income inequality of varying degree is an in-built feature of economies where private sector and price mechanism play a decisive role in the allocation of resources for economic development. Even in the USA, the strongest and the largest economy in the world about 12% people or about 40 million people are living below the poverty line as defined in the context of that country. So is the case with other developed economies with a system of resource allocation as mentioned above. However, income inequality in the developed economies is not a major challenging problem because a comprehensive social security system largely takes care of people living below the poverty line. But in countries like Pakistan, such safety nets despite a visible effort in recent years and expansion in the scope of half the needy people, remain a distant dream.
In Pakistan, a sizeable part of population, estimates ranging between 30% and 48%, is living below the poverty line. One of our regimes had arbitrarily reduced the daily calorie intake for an adult from 2550 to 2350 so as to reduce the number of people living below the poverty line. This article is meant to show that income inequalities in Pakistan have been aggravated by the operation of banks as financial intermediaries. Talking in terms of financial aggregates, as of 30th June 2014, 29513 account holders or 0.91% of total account holders used 78.35% of total bank credit (Rs 3187.31 billion out of a total bank credit of Rs 4068.045 billion). Compared with this, borrowers of relatively small amount (Rs 1 million or less) numbering 30.76 million or 94.98% of total borrowers borrowed only Rs 472.351 billion or 11.61% of the total bank credit.
These data conclusively show that banks are working for a very small percentage of account holders. Borrowers of small amount are getting only 11.61% of total bank credit.
On the deposit side small depositors with a deposit of Rs 1 million or less number 37.188 million or 98.18% of total number of depositors contribute 45.07% of total bank deposits.
Thus, banks are collecting a sizeable part of their deposits from small savers and patronising a very small number of borrowers. Also, deposit holders get a very small return by way of profit. They are given whatever is left after the lavish salaries and perquisites of bank employees and also deductions to make up for non-performing loans. Thus, borrowing from the relatively poor and lending to the rich is the exploitation of the former and hence is aggravating income inequalities. In this context it is relevant to mention that nearly 85% of bank deposit, mostly comprising current deposits, call and savings deposits and term deposits of less than 6 months duration are maintained by holders more for liquidity consideration than profitability. This aspect is fully exploitable by banks. Mobilisation of deposits and allocation of credit for various provinces tells a similar story. Relevant data are given in table 1:
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Table 1
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As of 30-6-2014
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Number of Province or Percentage share Percentage share in
territory in total deposits total bank credit
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Punjab 43.37 46.84
Sindh 32.80 44.85
KPK 6.90 1.167
Balochistan 2.11 0.323
Islamabad 11.47 6.51
Azad Jammu & Kashmir (AJK) 2.72 0.247
Other Territories FATA &
Gilgit Baltistan 0.62 0.067
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Thus a preponderant percentage (91.69) of total bank credit is being used in Punjab and Sindh Provinces whose share in deposits is only 76.17 percent. This means that Punjab and Sindh, particularly Sindh are utilising deposits of other Provinces. Areas other than Punjab and Sindh contribute 23.82% of deposits but their share in credit is only 8.31%. In fact, if Islamabad is excluded from these data, these areas-excluding Punjab, Sindh & Islamabad - contribute 12.35% of total deposits and their share in bank credit is only 1.8%.
The picture is even worse when we look at the rural-urban distribution of bank deposits and credit. The Table 2 contains province-wise data on rural-urban distribution of deposits and credit as of 30th June 2014.
The data in the table 2 tell a very sad story. It emerges that in the process of excluding credit rural areas with 59% of country's population have been neglected as if under a scheme to deny them access to bank credit. Rural area contribute Rs 767.63 billion (9.53%) to bank deposits but get only Rs 173.63 billion (4.26%) by way of bank credit. However, it needs to be mentioned that in relatively small provinces - KPK, Balochistan & AJK - the share of rural credit in their total credit is much higher than in bigger provinces.
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Table 2
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Share of Urban and Rural Areas in bank
deposits and bank credit
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As of 30-6-2014
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Rs Billion
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Pakistan Total Urban Rural
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(%) (%)
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Deposits 8051.57 7283.93 767.63
(90.47) (9.53)
Credit 4068.57 3894.54 173.50
(95.74) (4.26)
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Punjab
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Deposits 3491.82 3079.47 412.35
(88.19) (11.81)
Credit 19.5.29 18.2.02 103.27
(94.58) (5.42)
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Sindh Total Urban Rural
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Deposits 2641.48 2535.57 105.91
(96.00) (4.00)
Credit 1824.54 1768.10 56.44
(96.91) (3.09)
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KPK
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Deposits 555.27 453.97 101.29
(81.76) (18.24)
Credit 47.46 41.66 5.81
(87.78) (12.22)
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Baluchistan
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Deposits 170.18 145.17 25.01
(85.30) (14.70)
Credit 13.13 8.23 4.90
(62.68) (37.32)
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Islamabad
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Deposits 923.77 907.24 16.53
(98.21) (1.79)
Credit 264.86 264.36 0.51
(99.81) (0.09)
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AJK
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Deposits 219.00 129.04 89.96
(58.92) (41.08)
Credit 10.05 8.37 1.68
(83.28) (16.72)
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Other Territories
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Deposits 50.05 33.47 16.59
(66.87) (33.13)
Credit 2.71 1.80 (0.9)
(66.42) (33.58)
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Source: State Bank of Pakistan Statistical Bulletin
October 2014 pp.90-93
As regards rural-urban distribution of deposits and bank credit the worst situation prevails in Sindh Province. Relative to its share of population (23%) and share in GDP (26.7%) Sindh is the biggest beneficiary of bank credit (44.5% of the total). Sindh's credit: deposit ratio at 69 is the highest in the country compared with Pakistan (50.53), Punjab (54.56), KPK (8.55), Balochistan (7.71) and Islamabad (28.67). Yet the share of credit for rural areas in the total credit is only 3.1%.
Credit availability and its use are one of the several indicators of relative backwardness of rural Sindh. It appears that neither the banking community nor the Government of Sindh has given any attention to this aspect. Only a major and well-organized initiative by both the banking community and by the government of Sindh can effectively address this problem. Needless to say that bank credit provides purchasing power and can take care of many problems which would otherwise remain unattended.
One more thing about the volume of rural credit in general. Traditionally, banks have been interested, almost exclusively, in mobilising deposits from rural areas without giving any attention to credit needs of rural areas which have mostly been met by professional money lenders at an exorbitant rate of interest.
I vividly recall that sometime back most of the big banks had closed down a number of bank branches in rural areas as such branches were not found to be profitable. This is a myopic view of things. Bankers should realise that the very existence of a bank branch, even if it is not making profit, improves the image of a bank. Also, bankers should realise that when people in rural or in otherwise unbanked areas use banking facility this very act exposes people to physical and social infrastructure of the country which is very helpful in the process of economic development.
(The writer is former Deputy Governor State of Pakistan)
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