KARACHI, Oct 4: State Bank of Pakistan Governor Dr Ishrat Husain has put the commercial banks to a critical test. He has persuaded them to develop their own code of ethics on best banking practices while updating prudential regulations relating to corporates and evolving new ones on SMEs and consumer banking.

Whereas the central bank is moving towards a more effective monitoring of the banking system, it is empowering the Pakistan Banking Association as an inter-mediatory body and turning the SBP into a regulator of the last resort. Any excessive risk or underhand dealing of an individual bank would have to be checked by the PBA. A failure would bring a bad name to the banking community.

Mr Zubyr Soomro, who has been chairman of the Pakistan Banking Council for the past three years, is retiring with the satisfaction that he has turned the PBA, a toothless organization, into a self-regulatory body to work for the collective good of the banking system and put it on sound and healthy footing. During his tenure, the PBA has also turned into a consultative body for the State Bank, which does not take any major decision without involving the PBA.

Since assumption of his office Dr Ishrat has emphasized the need for self-regulatory organization (SRO) for the banking system.

Speaking at a luncheon hosted here on Saturday by PBA chairman Zubyr Soomro, the SBP governor spelt out the difference between the banks and the regulators. The bank management knows so much about its business and the risks in its business. The regulators would never have the resources to be able to match their knowledge to have a true assessment of the risks. The SRO would have a much better assessment of the business risks.

Based on the Financial Service Association of the UK model, Pakistan Banking Association chairman Zubyr Soomro has developed a transparent self-regulation system with added features related to Pakistan. The Code has been approved by the PBA executive committee and has now been circulated to the member banks for implementation.

The SBP expects that the PBA would enforce good behaviour and good corporate governance on its members. Dr Ishrat believes that the PBA and the bank management were in a better position to collectively handle issues of excessive risks, underwriting risks, underhand practices by individual banks and cartelization for short-term gains that damage the foundation and the stability of the banking system.

Meanwhile, three separate prudential regulations relating to corporates, small and medium enterprises and consumer banking have been finalized by the State Bank in close consultation with the Pakistan Banking Association and would be announced soon.

Welcoming the governor, the PBA Chairman said changes in the economy and development in the financial sector over the last six years necessitated a revision of the prudential regulations on corporate lending, done very infrequently in the past.

Mr Zubyr says that instead of raising issues the PBA now works with a proper structured approach to interact with the central bank on a wide-range of issues, highlighted by a quarterly meeting with the SBP governor. The PBA is involved in providing input on issues before the changes are made, rather than agitating once the laws are announced. Mr Zubyr is happy that the dialogue on prudential regulations with the State Bank has concluded.

Dr Ishrat confirms that the central bank does not take any major decision without involving the Pakistan Banking Association.

The new PBA executive committee has elected Shaukat Tareen, Chairman of the Pakistan Banking Council, as the new PBA chief.

Another important step taken by the PBA towards credit sharing, information sharing, credit history and transparency is the automation of the Credit Information Bureau records. The PBA has financed the CIB from its own funds and now the cost is being shared by all banks and the system is working well, says Mr Zubyr.