APROPOS your editorial ‘Bank profits’ (Sept 28) highlighting the recent trend of disproportionately rising profits earned by banks from their operations in Pakistan. It is indeed true that banks are generally reporting a progressive increase in their profit rates over the last many years. Their net profits, which used to be in the millions until recently, are now in the billions!

Let us consider another fact: all our banks, Islamic or conventional, are supposed to be working on a profit-and- loss sharing or PLS basis, purporting to mean that banks fix no predetermined profit rates on the deposits placed with them by their customers/the public and that their profit amounts/distribution would be according to the volume of the bank’s total profit; increasing if the bank earns higher profits and decreasing if its profitability declines.

Records show that returns on customer deposits have rarely or never been according to the rise and fall in their profitability (well, fall in bank profitability has been a rarity and only afflicting some very badly managed banks). While banks boast a rising profitability, from millions to billions, the return on customer deposits has steadily shown an overall downward trend recently. That’s simply because banks are not really working on a PLS basis; they adjust their returns to the customer mainly on the basis of prevailing discount rate and other money market rates, regardless of the spread (which is arbitrarily determined by the banks themselves) they earn between their cost of funds and the amount they earn on their investments.

Thus, it is not only blatantly unfair to banks’ depositors but also hypocritical to the claim that banks in Pakistan are working on a PLS basis! Will some regulator look into it, please?

A. Jalal

Lahore

Published in Dawn, October 5th, 2015

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