Poor governance results in battle for the turf
12 February, 2008
The State Bank of Pakistan feels that the Competition Ordinance 2007 could have serious implications for the banking sector.
EDITORIAL: The central bank also has strong reservations that because of its non-involvement at the time of finalising this law, it has numerous "catch-all" provisions which could be applied to banks without taking into account the time perspective of SBP's policy thrust.
The Central Bank's concern emanates from notices received by members of the Pakistan Banks Association that all 42 of them shall offer four percent of the profit on savings accounts having average balance up to Rs 20,000 under an "Enhanced Savings Account Scheme". But the facilities and charges for ESA account holders will be uniform.
The Competition Commission of Pakistan (CCP), taking note of the PBA announcement, has issued notices to various banks for public hearings to ascertain whether ESA was in contravention of the rules and regulations of Competition Ordinance 2007. ESA was devised by PBA members, in consultation with SBP, for a segment of customers classified as 'small savers', having balances upto Rs 20,000 in their profit and loss saving accounts.
All the banks need to do is to place before the CCP facts and materials that ESA is part of the policy thrust of the central bank to attract a pool of small savings and expand the coverage of banking in the country. As such, there is nothing to hide or fear.
SBP would not be asking the government to exempt banking sector from the Competition Ordinance 2007, had the central bank been consulted by the Ministry of Finance, while finalising the law. This mistrust between the regulatory bodies, created for the general good of the society, originates from the government's endeavour to restrict the autonomy of regulatory bodies and keep them under ministerial control.
Regulators are an essential element in a market-based economy. They are meant to provide a platform where all stakeholders' interest are kept in a balance. Unilateralist in law making has resulted in giving an impression of a battle for the turf between the two regulators.
With the Islamisation of banking and introduction of the PLS schemes, the returns to depositors on various accounts, term and time deposits were clearly delineated under a formula devised by SBP. Gradually, SBP itself relaxed the formula by giving more flexibility to banks to compete with market based returns. The problem arose, in 2002, as lending rates collapsed to two-four percent.
The depositors started howling on getting dismal returns on their savings. Initially SBP opted for 'moral persuasion' improvement in the returns given to small savers. Resistance from the big five banks to let the market determine these rates was strong. It is well-known that the 'big-five' did meet on six monthly basis, to settle among themselves the returns paid on saving accounts, etc. However, it goes to the credit of SBP that it finally got PBA to come up with the ESA scheme.
The government has not so far given a firm approval to how the Competition Commission of Pakistan is to be given financial independence. The proposal to add a certain percentage on top of the existing fees and charges taken by other regulators looks quite odd. Since the Competition Ordinance 2007 has replaced the Monopolies and Trade Practices Ordinance 1970, it would be more prudent to obtain funding for the Commission from within the charges and fees levied by the Securities and Exchange Commission of Pakistan.
As a general rule regulators seek help from one another to obtain sectoral studies and also in probes/investigations. As such, broad representation on the Commission's consultative board of other regulators would be advisable. However, this should not in any manner affect the judicial functions of the Commission. At the same time, the Commission must refrain from "over-reaching itself". If it does, we fear it could become a moribund body like the Monopoly Commission. This newspaper all along has favoured market-based policies and stressed reliance on private sector as the engine of growth.
At the same time, we are against abuse by dominant companies or prevalence of unfair trade practices. Regulators are supposed to be feared and respected. But it is also their duty to play a guiding role and also be supportive of the regulatees in allowing business enterprises to thrive within a legal framework.