In an age of aggressive globalization when major financial institutions are merging into, and emerging as, super-giants globally, there is little scope for little financial institutions in large numbers to survive viably in Pakistan.

So the State Bank of Pakistan with a governor who has a world view of banking has been demanding larger capital adequacy for financial institutions in Pakistan while the Securities and Exchange Commission of Pakistan has been urging the non-viable institutions to merge. And the CBR has come up with tax relief for those who merge.

Not only in the US and Japan have there been large mergers of banks and other financial institutions, but also in conservative Germany.

And in Pakistan, the branches of the Chase Manhattan Bank were acquired by the Muslim Commercial Bank.Earlier the Bank of America’s branches were acquired by the Union Bank . The Emirates Bank in Pakistan also merged with the Union Bank this year. And the two larger foreign banks in Pakistan - the Standard Chartered Bank and Grindlay’s Bank - have merged.

The fact is that when the financial sector liberalization was ushered in the early 1990s, too many small banks and a great many financial institutions exceeding 100 came up within a short time. If instead, their setting up had been staggered we might not have seen a great many institutions in real trouble and some of them closing down.

Five of the new banks closed and along with them the privatized Bankers Equity and the official largest development finance institutions in the country— the National Development Finance Corporation (NDFP), folded up. And the Allied Bank had several narrow escapes because of the excesses committed by its presidents.

Hence the current move for the merger of many of the units. The SECP has so far approved 14 merger schemes involving Modarabas, leasing companies and mutual funds. And nine of these mergers have been approved by the High Court as demanded by law, and as a result, 17 institutions have been merged.

But that is a solution only of a part of the large problem. There are still as many as 45 modarabas, 30 leasing companies and 14 mutual funds, making a total of 89 institutions. The problem with many of them is their majority-share holders want the distinction of being their bosses, enjoy the varied facilities offered by such institutions, including swanky limousines and their personal expenditure and use some of the resources of such institutions for their own benefit.

What they lack and abhor is the corporate style of management and rewarding themselves. In the case of one of the modarbas, the UNICAP, the majority share-holders vanished with the entire capital of the madaraba and were reported to be in the Gulf. Others may not have gone to such extremes but the conduct of some of them leaves much to be desired.

The solution to the problem lies in greater vigilance on the part of the SECP, insistence on lager capital adequacy and strong checks on abuses by their controllers or bosses.

A striking element in Pakistan is the old 22 families of which a great deal of mention was made in the 1960s and 70s have been splitting and splitting. Brothers, sons and grand-children of the founders of such industrial empires want to do things their own way. Some of them were educated in the West and in good business schools and want to do business in their own way and not in the manner their grand fathers or fathers did.

While the privatization of Zulfikar Ali Bhutto undermined some of the families, the others like Dawoods, Adamjees, Bawanys and the Crescent Group have split. In the case of the Adamjees their major enterprise, the Adamjee Insurance, is going out of their control as some of the family members sold their share which were acquired by Mian Mansha of the MCB.

Now the Crescent Group is in the lead in acquiring new financial units, while Altaf Saleem, chairman of the Privatization Commission, is trying to privatize many large financial units, like the United Bank, the Habib Bank, the ICP and the NIT. There are plenty for those who want to pick up large financial units. The Cresent Group has so far acquired the Altawfeek Bank, and majority shares of First Leasing Company and the Paramount Leasing. And Mian Mansha is out to get the UBL and is one of the top claimants so far.

The PIC, in which the government does not have majority share- holding contrary to public belief, is also in the market to acquire new units as it has the money. And the Abamco of Jehangir Siddiqui is also looking for new units to take over or manage.

Such consolidation of the financial sector is good for the corporate sector and the economy of the country. Ultimately they will have to do more of self-regulation instead of the SECP and the State Bank breathing down their necks all the time.

Some of these units were having foreign exchange transactions but that business has become small now. And a new law proposed to prevent money laundering prescribes three years’ jail term and a heavy fine for bank executives.

Bankers involved in malpractice have so far got away with

little or no punishment. The times are changing. It is not only those who grab public funds who should be punished but also those who misuse or embezzle private funds as they too hold offices of trust.

The corporate sector has to be made strong and enabled to use their share-holders funds well instead of them borrowing more and more from the banks and then defaulting. That is how the mutual funds whose number is increasing will do well and give fair returns to the share-holders.

At a time when NIT and ICP are to be privatized the government has the obligation to see those who acquire them or set up other such institutions manage them well, and contribute to an increase in savings and investment which are too low in Pakistan now.

And the investors have to be encouraged to use more and more of their own capital instead of relying on the banks too readily and borrowing more and more and then defaulting.

The non-performing bank accounts which now total Rs. 300 billion are said to be partly the result of the very high interest rates of the past. And now when the banks are to lower their interest rates steadily the investors may be tempted to borrow more as credit becomes cheap and still default. The government has to take adequate steps to ensure such irregularities are not committed now and in the years to come as interest rates come down.

At the moment the major investors are doing more and more for term Finance Certificates. The banks and the affluent persons with surplus incomes love that. But when the interest rates come down they may shift to borrowing from banks instead of relying on their share-holders, who may expect a better dividend than the interest rates paid by the banks. Such tendencies will have to be checked and the norms of a healthy corporate sector made to prevail.