September 17, 2007	Monday	Ramazan 04, 1428

Banks in Pakistan have on an average increased their profit by 45 per cent in the quarter ending March last over the same quarter in 2006. But are the millions of deposit holders , particularly the small ones who boost resources of the banks, happy and hope to prosper by the substantial increase in profits?. The answer is a definitive no.

The reason is while the profits of the banks are leaping up, they benefit the shareholders who are small in number and push up the price of the shares in the stock market and the government is delighted by the larger tax revenues the banks are promising. At the same time, the depositors continue to receive a raw deal, particularly the small ones with relief promised to them but never really delivered.

The State Bank wants the banks to give the depositors a better deal, it does not want to coerce them. But the banks are not raising the interest rates or doing that very selectively. So the State Bank governor Dr Shamshad Akhtar advised the depositors to keep their savings in fixed deposits which yield higher savings but it is not every depositor who has Rs100,000 to earn seven per cent from Habib Bank.

So the State Bank is advising the small depositors to prefer Islamic banking. But Islamic banking is small in size. It has a 3.5 per cent share in the overall banking. The governor of the SBP wants that share to grow to at least 15 per cent of the overall banking in a short period,

But Islamic banking has a limited number of banking products, as a seminar organised by the Federation of Chambers and Commerce was told and not enough capital to meet the needs of trade and industry. However, the banks from the Gulf countries are trying to set up more Islamic banks. Meanwhile, the SBP must not want the banks to keep all their profits to themselves or distribute them among the shareholders. It wants them to set apart profits equal to the non-performing loans of banks which now stand at Rs184 billion.

In fact, the non-performing loans which came down from their peak of Rs250 billion have increased by Rs8 billion in the last quarter, so action has to be taken to provide for the NPL when large profits are readily available.

But that can mean the banks losing Rs40 billion of the profits over four years unless the stuck-up loans are recovered from the delinquent borrowers. Meanwhile, the SBP has taken measures to enlarge the capital of the banks and make their capital base strong.

Banks which do not have a large capital ask their share holders to subscribe to their right shares as did the IGI Bank and the NIB. Now the KASB is offering right shares for Rs1 billion. The banks have gained in two ways. One is the rate of income tax has been brought down from 70 to 35 per cent and then the profits have increased enormously. Their share prices have shot up and are now leaders in the Karachi Stock Exchange. The weak or under-capitalised banks can merge with each other and become strong as strengthening the capital base is to be a continuous process.

If Islamic banking has to become popular , t has to give far better returns to the depositors than commercial banks do. It has to develop new banking products to meet the varied needs of trade and industry. It has to become more innovative and fast moving with enough capital at its disposal. Islamic banking needs Islamic bankers totally committed to it and not those who seek four cars and 14 servants at the expense of the bank.

The government has now decided to rename the Central Directorate of National Savings (CDNS) as simply National Savings and make it more efficient and with enough flexibility. It will be operated on a commercial basis and can offer better returns to the depositors without the impediments which hampered the CDNS so far. The federal cabinet took the decision renaming the organisation last week. It will still be a public organisation, so how well it functions as a commercial organisation remains to be seen. Meanwhile, the government has promulgated an anti money laundering ordinance. What ramifications it has on the banking industry and National Savings have to be seen.

With Ramadan already in, another controversy has arisen between the banks and its small clients. And that is in respect of arbitrary Zakat deduction by the banks.Too many bank branches are not helpful to their customers and make arbitrary deductions.

Zakat deduction law is also defective or misleading. Salaries paid through the banks are subjected to Zakat deduction.. The big clients of banks do not have a problem in this regard. They are big borrowers and debtors not subject to Zakat deduction. It is a small fry who gets into the crunch. The question of how the Zakat is used or misused is another major issue.

Foreign policy experts urge that we should have a self-reliant foreign policy . Self-reliance begins with savings, investment, manufacturing, higher production and larger exports. It is not based on consuming far more than what we produce and get in to debt and have a dependency syndrome as we have been having over the decades.

The rate of savings in Pakistan is the lowest in South Asia and that ought to be remedied effectively by reducing the conspicuous consumption.

One of the ways of achieving that is to provide a higher interest rate on savings which should be two or more per cent above the real inflation rate in a country marked for sustained high inflation and creating acute shortages out of abundant supply. The saver should not be a loser and see his savings go down in depreciating purchasing power of the rupee.