04 July 2004	Sunday	15 Jamadi-ul-Awwal 1425

KARACHI, July 3: The banking reforms initiated in 1997 designed to have fewer but stronger banks and based on the concept of universal banking have strengthened the commercial banks.

But there is growing realization that non-banking financial institutions (NBFIs) cannot develop with a growing appetite of emerging universal banks for an increasing market share of their businesses. The latest to lend strong support to this view is the Securities and Exchange Commission of Pakistan.

And financial analysts argue that the task of the regulators is not merely to frame rules and monitor but to work for the development of the business sector they control.

NBFIs complain of lack of even playing field because the commercial banks have access to cheap money (deposits) whereas the NBFIs are allowed to raise costlier funds from the market or borrow from the banks at uneconomical rates.

Besides, the commercial banks with their large network and cheap money have entered into leasing business specially financing of cars, offering tough competition to leasing firms.

Apparently, the leasing industry has been able to bring the issue of even-playing field for specialized institutions in policy-making arena.

The question facing the regulators is: Would the NBFIs be able to cope with increasing competition from universal banks? Will this pave the way for commercial bank's domination or even taking over by NBFIs? Will NBFIs be able to manage the new risks and uncertainties of a changing operating environment?

In a presentation on universal banking and its impact on NBFIs sent to Institute of Bankers, Dr Tariq Hasan, Chairman, Securities and Exchange Commission of Pakistan observed: "It is imperative that before moving on to the universal banking, we must carefully consider what the impact of this venture would be on the overall state of financial sector, particularly non-banking financial sector."

Under the financial sector reforms, the commercial banks are regulated by the State Bank and the SECP monitors and regulates the NBFIs.

Though Tariq Hasan was unable to make his presentation personally, it was circulated by the institute for discussion by a panel comprising former deputy governor R.A. Chugtai, Jahangir Siddiqui, Moin Fudda and Zaigham Rizvi.

Stating that the concept of NBFC should serve to complement the present banking scenario, the SECP Chairman said a healthy growth of NBFIs would depend on the universal banking model that is followed. Commercial bank subsidiaries that shall perform non-banking activities could provide competition to NBFIs but banks themselves entering into non-banking activities might not be just as feasible for the development of NBFI sector.

Normally, universal banking takes one of the three forms: in- house, separate subsidiaries or holding company. In Germany, investment and commercial banking is allowed in-house but separate subsidiaries are required for certain other activities. In the UK, the banks are allowed to conduct a wide range of financial activities through separate subsidiaries. The United States has adopted the holding company model and it requires separate capitalized subsidiaries.

Dr Tariq Hasan recalled that the NBFCs were created to offer specialized financial services and routine commercial banking was to be kept separate, primarily to ensure focused approach and appropriate handling of risks associated with specialized business by professionals with related expertise.

He also pointed to another risk in universal banking- that universal banking may lead to an unacceptable concentration of power and less competitive performance may be overlooked.

The State Bank's policy to have fewer but stronger banks and to promote universal banking has led to scores of mergers of financial institutions and banks. But many NBFIs are working hard to hold their own in a fiercely competitive environment.