Over the brief period since the 1990s began with the privatization of banks and their de-regulation one major investment finance or development finance institution has come to grief and folded and a new one is on the verge of closure, unless it merges with others. The servicing banks, if small, need to strengthen their financial and organizational base.

That has happened as following the deregulation of the banks they proliferated rapidly, and while the government was reluctant to give permission for commercial banks it permitted a number of investment banks, hoping their depositors and managements will be prudent.

But some sponsors out of their greed and their managers following maladministration mismanaged them, they either folded up or were forced to merge with other financial institutions.

And that happened despite the vigilance of the State Bank of Pakistan (SBP) with its amended Prudential Regulations and the Securities and Exchange Commission (SECP) with its vigilance.

Finance Minister Shaukat Aziz still believes in the usefulness of the investment banks, if well managed, and they do not rely on their interest earnings but on their management fees and expert guidance to other financial institutions.

Two major financial institutions which had closed down are the National Development Finance Corporation (NDFC) which was a government body and the largest of the its kind in Pakistan, which merged with the National Bank of Pakistan.

The second was the privatized Banker's Equity whose funds were grossly mismanaged by the new management. A third institutions of its own kind which is on the verge of closing down is the Islamic Investment Bank, which has the largest depositor base for an institution of its kind with Rs2.2 billion with the headquarters in Peshawar.

Apart from that a foreign bank with a good reputation like the Emirate Bank, closed down and its remnants merged with the Union Bank, following some wild lending of its deposits in Lahore by its Pakistani manager. Some other small banks have merged.

The Islamic Investment Bank is making headlines for a variety of reasons. Besides attracting a large number of depositors from the Peshawar region, who believe in the Islamic mode of banking, the federal government too has deposited Rs500 million in the bank to strengthen it. And it was listed with the Karachi Stock Exchange in 1990 and is now quoted at Rs7 per share instead of the face value of Rs10 after 14 years.

The accumulated loss of the bank over the years with several change of management personnel at the top is over a billion rupees, which means not only the equity is wiped out but also a part of the deposits.

The bank has also offered to manage the investment portfolio of the clients and others and Rs44 million had been deposited for that purpose as on December 31 2002. The bank at the end of 2002 showed a deficit of Rs 257 million in the cash management account.

And the external auditors of the company in their report for 2002 showed six reservations and did not offer to be reappointed as auditors. Hence some other company was nominated.

Though listed on the Karachi Stock Exchange in 1990, during the 14-year period it paid only one dividend of five per cent - in 2003 to pull itself out of the 'defaulters counter' in the KSE. And several share holders do not appear to have received the dividend or the annual report for 2003.

Mr. Bashir Ahmad, former managing director of PICIC, became chairman of the Islamic Investment Bank in the hope of salvaging the bank as it passed from hand to hand but he has not been able to make a difference.

Mr. Etrat Rizvi, Commissioner in-charge of Non-Banking Finance Companies Division in the SECP, has started an enquiry into the maladministration of the bank but he is being accused of starting the investigation too late, while he had enough of the unsavoury facts earlier to warrant a prompt enquiry and quick salvage of the fast depleted funds. It has series of scandals.

An annual general meeting of the share holders called for April 24 was called off, raising many queries. The record for total loss of the capital and investment in a finance company is held by the former managers of UNICAP Modaraba who vanished with the assets in Dubai.

The Al Zamin Modaraba Management (Pvt) Ltd who was asked to pick up the pieces left over, if any, could find no assets at all. None of the assets shown on the books were there. That was an absolute scandal.

The fact is the embezzlers in such cases move much faster than the SBP or the SECP, which means the regulatory institutions have to move much faster, and be a lot more smarter. And that is not easy.

The regulators of banks at Basel, Switzerland, after studying such problems over the years, have come to the conclusion that you can't go on over-regulating the banks to bring the them to the point of immobility.

That is the conclusion they have come to after studying various bank failures following the collapse of the long-term capital management in 1998 and Enron in the US in 2001. There are inherent risks in the financial businessness and cannot be "magicked away". "Their finding are: "financial dealings are nearly always, at root, unfair to someone."

Bank failures or defaults can be avoided if there is real transparency in their operations instead of excessive bank secrecy. That in effect means more of open banking than hidden transactions on a large scale.

Apart from the internal auditors doing a fair job, and warning managements of mishandling of funds, the external auditors have to do a good and honest job and warn the management and share holders of deviant tendencies in the bank.

The assets for which large loans have been given by the banks should be covered by insurance companies of repute and the insurance companies should warn bank managers before the assets are mismanaged.

The rating companies can do a good job of keeping a good eye on the efficacy of the banks and change the ratings if the standard of integrity go down. The share holders should receive regular reports and the SECP should examine these reports from time to time and more frequently in case of deviant banks.

Share-holders meetings should be regular and should not be largely ceremonial but truly informative. In a country which the sponsors of company have an overwhelming number of shares they can afford not to hide too much as the bulk of the profits anyway goes to them. In fact, the SECP should encourage dilution of the number of shares held by the sponsors or their families so that excessive abuses or deviation will not prevail.

Of course, the SBP has to keep a more vigilant eye on the banks, and the SECP on the non-banking financial companies. The State Bank has done well to direct development finance institutions to credit to their reserve fund an amount not less than 20 per cent of their after-tax profit for building up their reserves.

And after the reserve equals the paid-up capital, five per cent of the after-tax profit should be credited to the reserves. The DFIs are not also allowed to deal in real estate except for the use of DFI itself.

Earlier the State Bank has directed the commercial banks not to invest more than 20 per cent of their assets in shares. Many of the banks had already done that, and a few companies whose limit exceeds 20 per cent shall conform to that before the end of the year.

Evidently the SBP does not want the banks play the stock exchange and promote excessive speculation as the banks were earlier reported to be involved in speculation in shares in a big way and profited by that greatly.

Now a new organization with mandate to investigate banking sector crimes exclusively is on the anvil and a draft law for that purpose has been submitted to the government.

Called the 'national financial intelligence centre' (NFIC), the new intelligence set-up would have the authority to share and receive information from other financial intelligence units around the world.

The NFIC would have a director general appointed by the President, who will work under the finance minister. The law will go before the cabinet soon and thereafter before the Parliament before the end of the year.