The HSBC is expected to show a profit of over £12 billion in 2006. The other three top banks of the UK are also making huge profits.Part of the high profits that the Pakistani banking sector is making is attributed to the extraordinarily high banking charges on deposits while keeping the rates of return on these deposits pathetically low. The State Bank of Pakistan (SBP) Governor, Dr Shamshad Akhtar has expressed her serious concern about this wide gap between the banking charges and the rates of profits paid to depositors.
On a number of occasions in recent times, Dr Akhtar has warned the banks that if they failed to correct the situation soon, the SBP would be constrained to intervene to protect the rights of depositors. But so far her warnings seem to have gone unheeded.
Perhaps, the absence of a more effective official banking sector ombudsman and non-existence of civil society watch dogs monitoring the business practices of the banking and financial sector, could be one of the reasons why banks continue to indulge in immoral profiteering.
What is needed to be watched with extra care and more closely by the SBP and the concerned civil society organisations is the fine print that accompanies the consumer credit contracts. It is in this sector that banks find it easier to make questionable profits. But such unwise profiteering only destroys the borrowers, a development which in turn deepens the social tensions.
Recently when similar (but not identical) allegations of making unauthorised profits were leveled against banks in the UK by the consumer protection bodies and the media and the ‘affected’ customers filed complaints with their banks, instead of dragging their feet or going to the courts, the banks quickly repaid what was claimed as overcharged amount. The banks, however, refused to accept that they have been illegally charging customers for breaching their overdraft limits.
Leading banks charge fees of up to £40 when customers go over their overdraft limits. Additional charges are payable for bounced cheques, failed direct debits and in instances where the bank decides to honour a payment even if the customer does not have sufficient funds.
Some, banks have a set charge, normally around £25, when a customer goes into an unauthorised overdraft. On top of this, they will charge a further £25 for allowing a payment to go through, as well as rates of interest are as high as 25 per cent.
Banks tried to justify the high charges in front of the Treasury Select Committee last year stating that they had to pay for pursuing and collecting debts, speaking to customers and chasing payments. Bank charges to customers were arrived at by totaling these costs and then making assumptions about the number of customers that are going to incur charges.
British contract law entitles banks to recoup their costs when a customer breaks the terms of their accounts, imposing charges for administrative work such as sending out warning letters. However, making a profit on such charges is illegal and consumer groups have consistently argued that the level at which the fees have been set breaks the law for this reason.
Research by Which, a consumer group running an "Anti Social Banking Order (Asbo)" campaign for more than a year, has concluded that banks earned £4.7 billion from unauthorised borrowing charges last year alone. The Office of Fair Trading is expected to provide a final ruling within weeks on unauthorised borrowing charges.
Last April, the regulator ruled that credit card companies that charged more than £12 when customers exceeded their borrowing limits were almost certainly behaving illegally. It also warned that the same rules were likely to apply to banks and promised an investigation.
Consumer groups that have been campaigning to persuade customers to reclaim thousands of pounds worth of bank charges stretching back six years reported a huge increase in the numbers of people planning to complain since the matter was splashed by the UK media early last week.
Most banks, however, are said to have refrained from fighting these claims in the court, because they believe the cost to them of providing a lawyer and going to court is greater than the actual cost of recovering the disputed charges.
Vincent Cable, the Liberal Democrats' treasury spokesman, said: "What is emerging very clearly is that the banks have been allowed to get away for a very long time with excessive and unjustified charges, whose legality is doubtful. It reinforces the case for a robust champion of the consumer, in the form of the Competition Commissioner. We have calculated that every customer is now paying something like an average of £320 a year to bank shareholders.
"This has risen by nearly half, in real terms, under a Labour government. There is a real issue of very high levels of profitability that is not justified." He also condemned the high street banks for "acting like a cartel" by threatening to end free banking if the Office of Fair Trading compelled them to reduce their charges.
A spokesman for George Osborne, the shadow Chancellor, said: "Conservatives see tackling personal debt and financial exclusion as an issue of social responsibility. There is a role for businesses, individuals and government to work together. "Encouraging successful business and helping the increasing numbers of families who find themselves with too much debt is not incompatible. They should go hand in hand."
This last one is a very sound advice. The finance ministry in Islamabad, the SBP, the relevant civil society organisations in Pakistan and the country’s major political parties would do well to heed this advice and take a fresh look at our domestic banking practices with a view to make them more equitable.