October 23, 2006	Monday	Ramazan 29, 1427

Pakistan is expected to experience an explosion of insurance business and firms as an expanding insurance cover is required in an environment of high economic growth, particularly for the industrial and services sectors.

With government agreeing to 100 per cent foreign ownership and banks allowed to set up insurance firms, the industry may expand rapidly.

Besides, the massive privatisation of 26 major public sector enterprises in three years has freed the privatised firms to get their business insured with any company instead of only the state-owned National Insurance Corporation. That means very large business for the private sector insurance companies.

In addition, foreign investment is coming in large measure and new companies need adequate insurance of their choice. They are assured large insurance business for foreign companies.

And with the foreign investment increasing particularly in the energy sector, telecommunications and in the IT sector the scope for business for foreign insurance companies has opened up in a big way.

But as the law stands today, the government may still be the gainer as all insurance companies have to re-insure a portion of their insurance business with the public sector insurance corporation.

But, the foreign insurance companies are going for the killing in a big way. They are not content with the 51 per cent share holding they are permitted now. Instead they want to invest all the hundred per cent capital of the company and the government has agreed to that.

For all, that they have to bring only $2 million as capital and can raise an equal amount which any good company can easily do.

They are asking to be allowed to subscribe hundred per cent of the capital on their own as other foreign investors have been given the same right to be on a level playing field with the domestic investors.

Another major development is that the banks are now allowed to set up their own insurance companies and insure their banking business. This facility will be available to foreign banks as well on the basis of a level playing field for all.

And this could be the most hazardous or dangerous part of the banking reform. When the banks insure their own business transactions they may provide insurance cover to phony loans transactions as well.

The managers may not insist on adequate or proper insurance cover for their large loans or major import export- transactions. The collateral they secure for large investment loans may be too small or too phony to cover the loans. As a result the banks may suffer large losses and the depositors and the ordinary share holders may come to grief.

Even without banks having their own insurance companies, malpractices in obtaining insurance cover are many. As a result the large industrial bank has sunk with bad loans of Rs27 billion and the State Bank of Pakistan has finally called for an inquiry not through the normal banking channels, but by the FIA or the National Accountability Bureau so that the criminal practices of the loan givers established and the guilty punished according to their crimes.

Similarly, an inquiry against the manner in which the Crescent Standard Investment Bank was bankrupted by its directors has been making headlines. One of its directors, Iftikhar Soomro wrote a highly revealing letter to a city newspaper detailing the follies of its managing director and other top office holders which brought the bank to this sorry pass.

This is a country in which at least three banks- the Indus Bank, the Mehran Bank and the Bankers Equity were utterly bankrupted and the National Development Finance corporation was merged with the National Bank as the run on the investment bank began. More insecure banks are now seeking mergers with stronger banks.

The State bank of Pakistan as a guardian of the commercial banks has not been able to insure the integrity of the banks. So, how could the banks now manage their loan portfolios better if they have their own insurance companies to protect their loans.

Simultaneously, a great deal is being done in the name of Islamic banking and efforts to promote Islamic mode of insurance in the name of Takkaful. What has been done for long in the Industrial Development Bank of Pakistan and the Crescent Standard Investment Bank is not only contrary to all the norms of banking but against all the Islamic principles in an Islamic state. How can we now allow such banks to have their own insurance companies and multiply their malpractices?

And how banks having their own insurance companies and insuring their loans compatible with BASEL 2 which seeks a rigid banking discipline among the banks and bankers. It is certainly against the spirit of BASEL 2.

In a country where the non- performing loans rose in the 1990s to Rs250 billion or one- third of the bank advances, the banks cannot be allowed to provide their own insurance cover to their own loans.

The United Bank which is largely owned by UAE‘s ruling family along with Sir Anwar Pervez is in the lead among foreign banks to have its own insurance company. It is moving fast in that direction.

While more and more foreign companies are to come, the State Life with its very large assets is to be privatised, but that does not seem to have a high priority.

As more insurance companies come in, we have little to fear about foreign banks setting them up, except for new comers in the Gulf who are new to the business. But the Pakistani banks with their large deposits and shareholders funds should not be encouraged to set up their own insurance companies.

There is plenty of scope for banking and insurance business if Pakistan becomes an energy corridor for Central Asia and West China or the industrial and commercial hub of the region. But the two institutions should remain separate and errant bankers should not be allowed to provide insurance cover to large loans which may go down the drain.