The banking sector reforms were initiated in the early 1997 by inducting professional presidents from the private sector in major state-run commercial banks.

Later, the process of reforms was geared up by the country’s financial managers Shaukat Aziz/DrIshrat Husain in the late 1999. As the financial health of the HBL and UBL was precarious, the government injected funds in these banks even prior to 1999 by resorting to borrowings from the IFIs. This process was speeded up by the new economic managers.

A sum of over Rs65 billion was poured in the sick banks- specially in HBL and UBL- during 1997-2002 by overseas borrowings.

The focus was to take the sick banks out of wood by using tax payer’s money and then to privatise them. The strategy included redundancies for ‘cutting costs’. Banks became robust by 2001/2002 and the HBL/UBL were immediately sold to foreigners and “internationalised.” When the banks had become robust, there was hardly any need for their sell-out and more particularly to the foreigners.

In the post-1999 era, there has been a lot of talk about GDP growth and mobilisation of foreign direct investment [FDI]. The GDP growth was led by the services sector including banking and telecommunications but created the least employment opportunities. It resulted in the heavy drain on the country’s existing foreign exchange resources because of imports and remittances of profit.

The growth in commodity producing sectors would have created large employment as well as export surplus[or import substitution] helping in earning/saving foreign exchange. The question is, why the overseas investors were so keen to move to the banking sector? Obviously, because they were getting return on their investment available nowhere in the world. (Table“A”).

The analysis of the performance of five large banks (which share about 60-65 per cent of the banking community’s assets/liabilities and profits) shows that in 2007 their after-tax return on investment [equity] ranged between 18 -33 per cent. The dollar investment is fetching huge profits. Since during last half a decade or so, dollar-rupee parity remained stable, the foreign investors did not have to lose on this account. The Table also identifies that the banks’ after tax profits rose by 13 to 41 times [average 23 times]when compared to 2000. Where would such profits be available?

Why FDI had become so important when we could have managed the system ourselves with appropriate administrative reforms? It would be recalled that a Pakistani banker Agha Hasan Abidi had established Bank of Credit and Commerce International{BCCI] at international level with most of the staff recruited from among the Pakistani bankers[also from Indians].

The bank was ultimately closed down on the charges of money-laundering. In fact, the closure of the bank was the result of anti-Muslim western bias.

In the days when trillions of dollars cross borders daily, can any western bank remain absolved of money-laundering? The money looted in the developing countries find safe heavens in the western banks.

And have the banks become more efficient after a decade-long process of mergers/acquisitions and privatisations? The higher the lending/deposit spreads, the more inefficient a bank would be. The international standard is 3-3.5 per cent spread. In our case it is double and in some cases even more than double. (Table “B”)

The higher spreads indicate inefficiency of our large banks. They are making huge profits for their shareholders [except NBP, all other banks are owned by the private sector though HBL/UBL are partially owned by the private sector foreign investors]. The bank with the highest spread is the most inefficient bank or the biggest exploiter of the depositors.

In spite of the directive of the State Bank of Pakistan [SBP] to send statement of accounts to the customers at half-yearly basis, many customers casually receive the same-say once in two years. Though Allied Bank’s spread is lower but without any advantage to the depositors as the bank has favoured the borrowers by offering reduced lending rate.

The SBP governor’s advice to banks to share their huge profits with the depositors by increasing the deposit rates has fallen on the deaf ears.

Consequently, SBP issued orders for payment of interest on savings accounts at the minimum rate of five per cent.

Not only do some banks ignore the SBPs advices, they also fail to observe legal provisions. A leading bank did not publish the list of non-performing loans in its annual report for 2005-2006.

Under the circumstances, the SBP needs to make concerted efforts to get the lending / deposit spreads reduced by getting the deposit rates enhanced.