HOW efficient are our commercial banks in providing services to their customers? I will provide some anecdotes about customer experience. While transactions and cheque clearing and settlement are faster now, services requiring personal visits to the branch and customer interaction with bank staff haven’t changed much.

One specific service is to reactivate a dormant account. Usually, it is your foreign currency account which becomes dormant. You probably opened it a while back, with dollars bought from the exchange, for the purpose of saving and hedging against inflation.

If the purpose is to save for the medium to long term, you will hardly perform a debit transaction in six months or a year. Your account will become dormant, and you would be unable to withdraw your dollar savings unless the account is reactivated.

This anecdote involves a reputed Islamic branch of a bank of foreign origin which is supposed to be a paragon of efficiency. The customer’s account was held jointly with his daughter. Under the branch officer’s instructions, both account holders visited the branch bringing their CNICs for biometric verification.

The latter went off smoothly thanks to Nadra’s efficient system. The branch officer then demanded the customer’s source-of-income certificate. The customer told him it must be in his file submitted to the bank when the account was opened. We need to update it on every activation or reactivation, the banker informed him.

A couple of days later, the customer again visited the branch to submit the required certificate. He was told that the activation process takes about a week, and he would be informed on his mobile when to come and perform a debit transaction.

The next day the customer received a call from the bank that there was a problem with his daughter’s biometric verification, and he must again come with his daughter for verification. The reader can imagine how the customer, who needed to withdraw some dollars urgently, must have felt. A week after, and the dollar account was still dormant.

I wonder what kind of difficulties expats face when their accounts become dormant. I know about a specific case where the account has been dormant for over three years as the joint account holders were unable to come together from the US at the same time.

One of them visited last year and was informed that he and his wife must come together for reactivation. Compliance requirements for this bank could be exceptionally rigid but other banks also take their time in reactivating dormant accounts.

Depositors are getting lower returns from Islamic banks compared to conventional ones.

I wonder why such stringent requirements are needed for a joint account with the ‘either or survivor’ option exercised by customers earlier when they first opened their account. One of them should suffice for activation just like one of them can withdraw from their active account.

Also, if a rupee account is active and the dollar account is under the same CNIC number, why are procedures for activation not simplified by commercial banks? Never having been a commercial banker myself I am not aware of the logic of their internal procedures.

Commercial bankers’ usual response about their cumbersome procedures is that this is because of State Bank instructions, which may not necessarily be the case.

Another anecdote is about a customer wanting to invest the minimum required balance of his account in an Islamic financial instrument. The branch manager listened kindly to his request and responded he could invest the amount in a government Sukuk, which is a safe and profitable investment option.

Compared with a profit of only nine per cent, it would generate close to 19pc. He was introduced to the relationship manager for performing the necessary procedures.

The customer asked why he was getting such a low profit rate when the State Bank policy rate was 22pc. He was informed that the central bank’s instructions of providing a minimum amount of return do not apply to customer balances in Islamic banks. A profit rate of 9pc compared to 19pc seems like a gross exploitation of customers.

Again, this anecdote is about the same bank and other Islamic banks might be giving higher returns. Obviously, the customer was eager to place his savings in a Sukuk, but was informed that the branch must first make his ‘investment profile’.

Also, the branch must wait for the updated ‘rate sheet’ of the Sukuk. After the rate sheet arrives, a deal letter must be signed by the customer and only then will the customer’s savings be invested in the Sukuk. The customer’s enthusiasm for investing in Sukuk fizzled out quickly after hearing of such a cumbersome procedure in today’s world of online connectivity and AI!

While a couple of anecdotes about one Islamic bank do not necessarily cast all Islamic banks as inefficient, they do highlight a significant problem faced by depositors of all Islamic banks: they get lower returns from Islamic banks compared to conventional banks.

According to the State Bank’s Statistical Bulletin, the rate of return on deposits (excluding current deposits) of conventional banks was 17.4pc and that of Islamic banks 13.2pc in June 2023. This is not a small difference. A customer with a deposit of Rs1 million was losing about Rs42,000 (4.2pc) per annum on average compared to a conventional bank. Islamic banking has completed over 20 years now since its inception in 2002.

At the initial stages, there was a genuine reason for providing lower returns to depositors because their excess liquidity remained un-invested in Sharia-compliant government securities.

Islamic banks do not face this problem nowadays. They invest in government Sukuks and park their short-term liquidity in the State Bank’s Sharia-compliant schemes. Yet they continue to provide lower returns to depositors.

Conventional banks are also making windfall profits in the current environment of high interest rates. Both conventional and Islamic banks together made exorbitant after-tax profits of Rs284.5 billion in the first half of 2023.

Both banks are having a heavenly time on the pure earth of our country irrespective of their Sharia-compliance! Several years ago, a senior expert from an international rating agency remarked in an official meeting that “Pakistan is a bankers’ paradise” despite their inefficiencies.

The writer is a former deputy governor of the State Bank of Pakistan.
rriazuddin@gmail.com

Published in Dawn, November 11th, 2023