THE State Bank of Pakistan has asked all banks, development finance institutions and microfinance banks to develop their own framework for fair treatment of consumers and to start implementing it from July 1, 2015.

The central bank has taken this step after noticing for a long time that despite all its efforts, the concept of financial consumer protection was being perceived as only a complaint handling process. It has moved to provide some required policy guidelines to banks, DFIs and MFBs to develop the framework.

The SBP’s consumer protection department and the office of the banking ombudsman started operating about a decade ago. Both have contributed significant ideas to tackle financial consumer’s issues and to keep them fully satisfied. “The growth of the informal economy cannot be checked unless financial service seekers have a strong belief that banks won’t misinform, deceive or mistreat them,” says a senior SBP official.

‘The growth of the informal economy cannot be checked unless financial service seekers have a strong belief that banks won’t misinform, deceive or mistreat them’

He says by answering some key questions and addressing some crucial issues, banks can make sure that they are protecting their consumers. One important question is whether it is the priority of a bank’s management to identify and address consumer protection issues. “If the answer is yes, then that bank has moved half way towards developing a framework on fair treatment to consumers. The rest will follow.”

The identification and redressal of consumer protection issues ought to be a top priority for banks so they could not only survive and grow in a fiercely competitive industry, but also ensure that their frustrated customers are not tempted away, even partially, by informal lenders.

Informal lending, once restricted to rural areas and in big wholesale markets like Jodia Bazar of Karachi and Yarn market of Faisalabad, is fast spreading, threatening sustainable growth of the banking industry.

Similarly, multi-billion rupee scandals involving individual money swindlers, fake modarabas and unauthorised investment companies keep surfacing from time to time due to weaknesses in the regulatory system and also because of low financial literacy and little confidence of small savers and loan seekers in the banking system.

If banks, DFIs and MFBs can see whether they are selling and marketing the products and services that meet the changing needs of various consumers, including those who can fall prey to parallel banking, such issues can be addressed to a great extent.

“So, this too should be part of their framework for fair treatment of consumers,” says another central banker, quoting from the SBP’s policy guidelines.

Over the years, financial product development has not received the kind of attention it deserves. Pre-launch market research is scant and scattered, and the procedure for approval of products and services still rotates around old models of sanctions and approvals.

“Top executives whose final nod is a must for the launch of a product don’t even listen to their colleagues, to talk nothing about incorporating the market’s feedback,” complains a mid-tier official at a local bank, citing this as a reason for the failure of some consumer finance products of his bank.

Central bankers say another point in treating consumers fairly is that they must be kept appropriately informed before, during and after the sale of a product or service, and add that banks often fail on this count. The office of the banking ombudsman receives hundreds of complaints every month wherein borrowers point out that they were not appropriately informed and in time about how applicable interest rates would change and so on.

The bulk of lending these days is done on floating rates, with yields of Treasury bills or PIBs serving as base rates. Banks charge a premium of a few percentage points on these yields and often set a floor and a ceiling. But instead of letting customers know after every auction of T-bills or PIBs or at the end of a month that the new yields determined in the latest auction has changed the consumers’ cost of borrowing, they simply increase the amount of interest to be charged for the next loan installment.

This is the most common complaint we take up every month, and resolving some of them consumes a lot of time of the complainant and the bank, sources in the banking ombudsman’s office say.

Central bankers say the framework on fair treatment for consumers must also include clauses to identify potential risks to consumers throughout the lifecycle of a product or service. Besides, it should also set standards and envisage data sets that could be used to identify and analyse consumers’ risks for every product and service the bank offers.

Most importantly, the framework should envisage standards and timelines in the light of which a bank can see how quickly and decisively it resolves consumers’ issues, and what changes it needs to make in its products or services. The office of the banking ombudsman has already developed such standards and timelines from an arbitrators’ point of view from which banks can benefit as they draw up their own version.

If banks act rationally with their own long-term interest and those of their customers in mind, a culture of financial consumer protection will evolve “and move forward from merely an imposed notion” to a business code, says the SBP’s policy guideline paper on the subject.

Published in Dawn, Economic & Business, September 8th, 2014