KARACHI: The banking sector will be exposed to a “systemic risk” should the prevailing uncertainty continue for another few months, Habib Bank Ltd CEO Muhammad Aurangzeb said on Friday.

Speaking at a summit on financial crimes, the CEO of the largest commercial bank warned the participants about a “big blow to the economy” if the stakeholders didn’t make the right decisions swiftly.

“Even the smallest of institutions or the biggest of countries (need) timely decisions, timely execution. We’re not going to back away from the IMF (International Monetary Fund) programme… Whoever comes (to power) after the election will have to deal with the IMF,” he said.

The government has been dragging its feet on structural reforms like energy tariff adjustments for many months. Its reluctance to take tough decisions has led to inordinate delays in the disbursement of funds from the IMF. The resulting shortage of dollars has been so acute that the country is finding it difficult to import even the absolute necessities like food and energy items. Banks don’t have the funds to open letters of credit for the industrial sector, which has announced a spate of operational shutdowns because of the unavailability of industrial raw material.

“If you see the last 18 months, IMF on, IMF off,” said Mr Aurangzeb in a moment of exasperation. The prolonged spell of indecisiveness on the IMF issue is causing “economic stress” even though banks have “kept the show on the road” in terms of financing, he said.

The best way to fight financial crimes is to improve transaction monitoring and strengthen the know-your-customer (KYC) regime, he said. “It’s the banks’ first line of defence,” he noted.

Speaking on the occasion, serial entrepreneur Nadeem Hussain said opening a business account still takes about two months on average given the extensive documentation requirements.

“That’s a travesty,” he said, noting that the Securities and Exchange Commission of Pakistan (SECP) should be able to help banks verify credentials of business entities in real time.

“As for fraud, Pakistan has been fortunate compared to the rest of the world. We’re one of the few countries that have an online biometric verification process. Theoretically, if the process is followed… there should be no scope for faluda accounts,” he said while referring to bank accounts with substantial deposits even though the accountholders are people of seemingly little financial means.

Noting that there’s “no reason whatsoever” for the existence of dubious accounts, Mr Hussain said there’ve been many such cases in the recent past mainly because of the criminals’ connivance with unscrupulous staffers at the branch level.

A leading microfinance bank took an impairment charge of roughly Rs14 billion after it detected “irregularities and fraud” on its lending book in 2019.

The bank had to verify close to half a million borrowers to ascertain which ones actually existed, whether their capacity to repay was intact and if there was some irregularity in the way the loans were underwritten. It even stopped issuing new-to-the-bank loans for almost one and a half years while it cleaned its books.

“Fraud related to bank accounts can largely be curtailed if the process is followed,” said Mr Hussain. He suggested that a centralised KYC process be instituted where each bank has access to the verification that another bank has previously done on any client.

The SECP has already put in place a centralised KYC regime for mutual funds. The State Bank of Pakistan should follow suit for bank customers, he added.

Published in Dawn, January 15th, 2023