The recent decision by several banks in Pakistan to levy fees on high-value deposits has sparked nationwide debate on the ethics, legality, and economic implications of such measures.
This unprecedented development, set to take effect in December 2024, aims to address liquidity challenges and improve banks’ advance-to-deposit ratios (ADR). However, this decision has left depositors and financial experts questioning its fairness, legality, and long-term repercussions.
Traditionally, banks have incentivized high-value deposits as a means of strengthening their liquidity base. By charging significant fees instead, banks risk damaging public trust and alienating a key segment of depositors.
Greed and malpractice in banking: A detriment to Pakistan’s economy
The banking sector in Pakistan has faced criticism for its disproportionate investment in government securities, leaving the real economy underfunded and over-reliant on external borrowing.
This malpractice stems from a strategy that prioritizes risk-free returns over improving the advance-to-deposit ratio (ADR), which would involve lending to businesses and households. While these investments in government debt provide consistent returns, they stifle economic growth by limiting credit availability to productive sectors.
Banks are constitutionally obligated to act as financial intermediaries, channeling deposits into productive investments that generate employment and growth. However, their preference for government securities reflects a troubling aversion to risk and a failure to fulfill their developmental role. According to SBP reports, the ADR of several banks remains alarmingly low, indicating that deposits are not being utilized to stimulate private-sector growth. This strategy reveals the systemic greed of financial institutions prioritizing profits over national economic development.
To mitigate the risks of liquidity concentration, banks have turned to punitive measures, such as imposing exorbitant fees on large deposits. The recent announcement of a 5% monthly fee on deposits exceeding PKR 5 billion by several banks exemplifies this malpractice. This policy unfairly targets high-value depositors to compensate for the banks’ failure to diversify investments. It also discourages trust in the banking system, pushing depositors toward alternative financial solutions or cash-based economies.
The controversial move
Banks have justified high deposit fees as a way to manage excess liquidity, which has arisen from their inability to offer loans, and to avoid tax liabilities due to low Advance-to-Deposit Ratio (ADR). Critics argue that this undermines banks’ traditional role as custodians of public deposits, as large deposits have historically been seen as assets that support the banks’ loan-making capacity.
The fees are also seen as disproportionately penalizing depositors who entrust banks with significant capital. In global banking systems, high-value depositors are often rewarded with preferential interest rates or customized financial services, not penalized. The introduction of these charges could make Pakistan an outlier in the global financial landscape.
Legal and ethical concerns
1- Violation of contractual obligations: Banking relationships are governed by contracts formed during account opening. These agreements define the terms under which accounts are operated and maintained. Imposing fees on deposits exceeding certain thresholds constitutes a unilateral amendment to these agreements.
In many cases, customers were neither informed nor explicitly consented to these changes when opening their accounts. Such actions violate the fundamental principles of contract law and undermine the depositor’s trust.
2- Discrimination and constitutional violations: Article 25 of the Constitution of Pakistan guarantees equality before the law and prohibits discrimination.
The decision to target only high-value depositors creates an unequal framework that lacks justification. It is discriminatory to exempt lower-tier accounts from fees while disproportionately penalizing depositors contributing significantly to banks’ liquidity. Such policies could invite legal challenges under constitutional provisions.
3- Lack of transparency and regulatory clarity: The State Bank of Pakistan (SBP) issued the “Guiding Principles on Fairness of Service Charges” (2015), which pertain to services where banks allocate additional resources. However, SBP has not provided a regulatory framework for imposing fees on basic banking activities, such as accepting deposits.
4- Breach of fiduciary duty: Banks operate as fiduciaries, managing customer funds in a manner that prioritizes the depositor’s best interests.
By imposing fees without demonstrable service enhancement, banks risk breaching this fiduciary duty. Such actions may alienate depositors and lead to an erosion of trust in the banking system.
Economic and social implications
Weakened public trust in banking: Trust forms the foundation of the banking system. High-value depositors, often comprising businesses (and individual), rely on banks for safe custody of their funds. Penalizing this group through significant fees and that also unilaterally could lead to diminished confidence in banks’ ability to act as custodians of wealth.
Globally, banks often adopt a contrasting approach, offering incentives such as higher interest rates or exclusive privileges to attract high-value deposits. This ensures a stable liquidity base while fostering customer loyalty. Pakistan’s banking sector’s deviation from this practice could diminish its competitiveness in the international financial landscape.
The doctrine of proportionality and its relevance
The doctrine of proportionality, widely recognised in legal frameworks, requires that any action taken must be reasonable and proportional to its objectives. Applying this doctrine to the issue of deposit fees reveals significant shortcomings:
1- The fees are disproportionate to the services offered by banks.
2- They create undue hardship for high-value depositors without any demonstrated operational necessity.
3- Tax avoidance resulting from a low ADR should be addressed by aggressively introducing innovative, business-friendly, and people-centric products that enable businesses and individuals to engage in new and profitable economic activities, rather than penalizing large depositors, many of whom are State-Owned Enterprises (SOEs).
The imposition of fees on high-value deposits by private banks in Pakistan marks a troubling shift in banking practices, raising serious concerns about legality, fairness, and long-term implications.
These fees, introduced under the guise of addressing low advance-to-deposit ratio (ADR), risk violating contractual obligations and breaching constitutional protections. The absence of transparency and clear regulatory guidelines from the State Bank of Pakistan (SBP) exacerbates the issue, leaving depositors vulnerable to arbitrary charges.
By penalizing high-value depositors—many of whom are significant contributors to liquidity—banks undermine public trust and discourage large-scale deposits. This could drive depositors toward alternative financial systems, further destabilizing the sector. Rather than imposing such fees, banks should focus on aligning with global best practices, including fostering depositor confidence through preferential services and sustainable policies.
The broader criticism lies in banks’ preference for risk-free government securities over lending to private sectors. This approach limits credit availability for businesses and households, stifles economic growth, and deepens reliance on external borrowing. Banks are neglecting their responsibility to act as intermediaries that channel funds into productive investments essential for economic stability and innovation.
The State Bank of Pakistan appears to be grappling with uncertainty on this matter and has yet to take proactive steps to engage stakeholders or issue clear regulatory directives. This lack of action highlights a concerning inefficiency within the bank’s bureaucratic framework. It is imperative for the State Bank to fulfill its responsibilities without delay, providing the necessary guidance to ensure the banking sector operates transparently and in alignment with sound regulatory practices.
Copyright Business Recorder, 2024