Dude, where is the regulator?

Published September 12, 2022

Remember all the brouhaha (on Twitter) over how many loan shark apps had permeated Play Store in Pakistan and ripped off ordinary folks with misleading claims and exorbitant interest rates? It was enough for Google to take notice and remove some of the names.

Well, that lasted less than two months as two of the apps removed from Play Store are not only back again but currently trending in the top five of the finance category. Meanwhile, some unlicensed players took a page out of Islamic militant books and came back with a new name, all dry-cleaned. The entire episode seems to have made absolutely no difference to their modus operandi: annual percentage rates are still grossly understated and misleading marketing campaigns are in full force.

Meanwhile, the regulator continues to look the other way lest it may have to actually do something regarding the problem instead of asking the very offenders to self-regulate themselves. This is what it did last time when the issue was raised, calling a meeting with digital non-banking finance companies and issuing a press release that unlicensed players are bringing bad repute to the sector.

It makes you wonder where the regulator’s priorities lie: with its licensees or the public it has been entrusted to protect? Unfortunately, all evidence screams the former. Take the case of bancassurance, which has allowed insurance companies to book new business by leveraging banks’ branches who in turn make easy commission income. All at the expense of the customer, as the product is sold and designed in such a way that policy buyers — often widows and retirees — are misled into it and fail to get a return of capital, forget return on capital.

The SBP and SECP need to realise that customers also deserve at least some of the benevolence they so generously bestow upon their subject entities

Over the past few years, it has been the highest growing revenue stream for insurance players, Islamic or conventional, while earning banks commission incomes in excess of Rs1 billion usually. Swindling one of the most vulnerable groups, while morally deplorable, it is still quite expected of bankers and insurance executives to be a leech. But the regulators’ continuous negligence of the situation is concerning.

Both the State Bank (SBP) and the Securities and Exchange Commission of Pakistan (SECP) are involved as the former oversees banks while the latter has been entrusted with the mandate for insurance companies. But instead of regulating them, the two entities have become more of their champions. Don’t get me wrong, they certainly should be doing everything in their capacity to promote the respective sectors, but not at the expense of the customer.

Perhaps proximity to industry professionals over prolonged periods has made regulators more sympathetic to their cause. At least more so than they are to customers, who do not enjoy the same access to those decision-makers and make themselves heard.

Perhaps proximity to industry professionals over prolonged periods has made the authorities more sympathetic to their cause

Or maybe, this looking the other way is just regulators trying to overcompensate. After all, they too need to show progress. The two examples above actually neatly fit into this: both insurance and lending penetration have remained dismal in Pakistan for the longest time. And when a certain category finally seemed to work, regardless of the tactics used, they were willing to ignore the shortcomings.

Of course, both the SBP and SECP have been entrusted with the task of developing their respective industries too. And there is absolutely no denying the many great initiatives they have undertaken, be it Raast, Roshan Digital Accounts or the regulatory sandbox. But they are still regulators first, with a responsibility towards the public — which is compromised every time a person pays upwards of 30 per cent in charges for a 30-day loan or a senior citizen spends their hard earned money only for a banker to chip away most of it in the near term.

There is no shortage of examples, but the magnitude of these two warrants special attention. For instance, the licensed digital lenders alone disbursed 839,281 loans worth Rs6.14 billion to 365,239 borrowers in 2021. The numbers reported by SECP for 9MFY22 were at RS11bn, mostly dominated by the two instant lending players.

Similarly, new bancassurance customers for each bank can run into tens of thousands. At what point exactly will the regulator realise that customers also deserve at least some of the benevolence it so generously bestows upon its subject entities?

Published in Dawn, The Business and Finance Weekly, September 12th, 2022

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