Since 2008, there has been a major boom in the financial sector of Pakistan. Finance has become a prestige’s endeavour, a source of revenue for many upper class citizens, it has become fashion.
This trend began to emerge with the correlation of the growing influence of the International Monetary Fund (IMF) in Pakistan’s financial affairs, which decided to “assist” Pakistan via $11.3 billion lending facility in 2008. Ever since Pakistan’s banking sector grown to historic levels and has become a magnet for profitability. Foreign banks such Barclays and Royal Bank of Scotland have arrived to the party in a timely fashion. The Banking sector of Pakistan posts an average profit of 36.41% (as a percentage of average capital) and surprisingly this figure is ranked number worldwide (Europe Banking sector posts an average profit of 8%). Unfortunately, during the same time the disparity between upper class and the rest of the society has grown tremendously.
The financial model employed by the banks operating within Pakistan, adopt the same principles - the same philosophy - that has been responsible for leading the Western hemisphere into the its current financial catastrophe, a catastrophe that has already embarked on historic proportions and is still, even by conservative estimates, a decade removed from losing its momentum. This model transfers wealth from the lower and middle section of the social pyramid to the peak by extracting rent or to be precise, parasitic interest rates on that segment of the population that is financially struggling on a month to month basis.
The central bank of Pakistan is currently holding interest rates at 12 % which is below the actual inflation rate estimated between 13-15% (Original method of calculation). In other words, the return on your savings is lower than the rising prices of basic commodities (Inflation is eroding the value of your savings). If an individual saves Rs10,000 today, he will be able to buy less with it in the future. A trend most Pakistani citizens are accustomed to. Savers, or to put it by definition, hardworking people that delay consumption should be rewarded by either having the ability to invest or consume more in the future. However, current interest rate policy is penalising savers. Lenders on the other hand are maximizing profitability. For example, at 12% interest rate corporate banks borrow money from the central bank at that rate, and then charge the industries, start up businesses and consumers rates that are anywhere between 20-40% (corporate loans, consumer credit cards, home & car loans) pocketing the difference. The interest on these loans trims a larger proportion of the profits earned by the productive sector and from the incomes earned by the general household.
This parasitic banking system is spreading its tentacles deep into the productive economy at the expense of the manufacturing base. It is not only drawing capital and profit away from the productive sectors of the economy but it also luring the potential and existing crop of intellectual capital, i.e. graduates from different fields of study.
Solutions for Sustainable Economic Growth
We need to raise central interest rates to 20% and keep them above the real inflation rate. This will transform the debt-based growth into savings-based growth. Irresponsible and excessive lending will cease as it will become too risky at these rates to lend to incapable borrowers. Accumulation of savings will start (capital formation) that will eventually be used for investment purposes in the long run leading to job creation. This will reward savers instead of the lenders, the household instead of the banks. Savings oriented growth is in the interest of the nation not economic growth that relies on an increase of household and business debt.
There is a need to regulate activities of banks by imposing high capital/reserve requirements. Loans or bonds should only be released to those individuals or industries that have sufficient assets or reserves in place and the capability to generate long term revenue. All of this requires stringent citizen and governmental oversight.
Economic policy should focus on diverting investment away from the financial & military sector and towards existing sources of real revenue like agriculture and textiles. The focus also needs to shift to the pillars that make up the engine for economic growth like transport, communication, energy & infrastructure.
The writer is a freelance journalist based in Germany
Published in The Express Tribune, December 12th, 2011.