Where is regulators’ joint committee?

The Securities and Exchange Commission of Pakistan (SECP) was required to be consulted in relation to the amalgamation scheme that seeks to combine KASB Bank and BankIslami to form one bank or structure. The keyword is consultation and not just State Bank of Pakistan (SBP) keeping SECP informed about its proposed action. We often hear that SBP works on established precedents and traditions. And, there is none. However, one learns from experience and avoids repeating the past mistakes. This was the precise reason why a joint committee of the two regulators was constituted by the then Governor, Dr Ishrat Husain, and the then Chairman SECP, Khalid Mirza. Ministry of Finance is the line ministry of the two apex regulators. And, it is their responsibility to oversee the process as per law; and the Ministry of Finance has to approve the scheme. The reasons why Business Recorder is pointing this out is an unfortunate controversy that is raising its ugly head in the print media.

The SBP Act now makes a clear distinction between sponsors and the big investors that need to provide details for ‘fit and proper’ criteria to be declared as kosher prior to crossing the sacred threshold of five percent. One may speculate that SBP decisions in the past have not been the best. However, no depositor has ever lost his savings. Sanctioning banking license to capital market players has not been a happy experience. Giving licenses to big industrialists may have diluted the oversight role of SBP, although big banks are performing well. Whatever may be the compulsion at that time – the results are, by and large, not happy ones as far as the regulator is concerned. Thus, SBP needs to gear up to the new realities. Banking sector is now overwhelmingly in private hands and this is precisely why most countries have decided that policymaking and enforcement functions need to be in different hands. There may be dangers of risks falling between the cracks, but then, there has to be a difference between protecting rights of minority shareholders and major investors comprising boards of Directors that oversee operations in financial institutions.

SBP may take a plausible position that its foremost duty is to protect the depositors. That may be correct. But SECP’s foremost responsibility is to look after the small investor. That is why both regulators need to meaningfully consult, and not just inform each other, in case of action against a listed company. There are now overlaps between industry and banking with same ownership that need to be accepted and may need a correction overtime. It is precisely the reason why the Ministry of Finance has to play a lead role as the line ministry of the two apex regulators or else provide them full autonomy both in law and spirit.

In our view, the entire controversy related to the KASB Bank was uncalled for and counterproductive and we would have refrained from commenting on the issue if it was not a matter of credibility and faith in our key institutions to act judiciously and make the right call. There should be no confusion that the State Bank is a watchdog of the country’s financial sector and has the mandate and the responsibility to protect the interest of depositors and ensure the soundness of the banking industry. Due to persistent losses for the last five years, KASB’s equity had eroded significantly and its Capital Adequacy Ratio (CAR) had turned into negative by 30th September, 2014, rendering it technically insolvent. After announcement of a moratorium, private banks were hesitant to come forward to salvage KASB because of the size of the dose of liquidity needed to be injected into the institution and the federal government was not willing to put any additional load on NBP. In addition, the Iranian deposits in KASB needed some kind of comfort from SBP. Insofar as Chinese investor was concerned, he was allegedly not willing to undertake ‘fit and proper’ test; nor was he prepared to divulge the information that the SBP needed. Obviously, if an entity whose ownership and sources of funding are not clear it cannot be entrusted with the license of a bank. The law requires SBP to be fully satisfied about a strategic investor in a bank. It needs to ensure that they are capable of fulfilling the fuduciary responsibilities and meet other obligations before they are authorised to collect public deposits. Foreign investment in the banking sector is of course welcome but it could only be accepted if it is within the bounds of laws and according to the regulations prevalent at the relevant jurisdiction. Also, it is very essential for the SBP to be extra cautious for the acquirer to have the necessary credentials or else a failure could have a ripple effect on the fortunes of the economy and also deprive the depositors of their life-long savings and ruin their lives. The present KASB Bank-BankIslami amalgamation scheme may not be the best bet but the State Bank seems to have considered all the relevant pros and cons and has come up with a reasonable solution to manage the issue. Fortunately, depositors in Pakistan have not witnessed the kind of sufferings generally experienced in some other countries when financial institutions go bankrupt. There was no need to politicise an issue which is purely professional.

The authorities concerned must work towards issuing red warrants against people who have escaped abroad leaving the small investors in the lurch. SECP has now been reorganised and strengthened. However, before SECP, there are also the front line regulators, ie, the boards of Directors and management of the Stock Exchanges, which now need to be more vigilant; their market intelligence and oversight needs to be strengthened and the perception of our bourses being a ‘casino’ needs to be dispelled. Further, both the regulators in joint consultation also need to get the mortgage financing and development institutions involved in SME financing and stop merely depending on micro-lenders to do the job. This is not enough if the growth targets are to be achieved. The legal hurdles that stand in the way also need to be jumped over – whether the law itself is an obstacle or the courts obstructing its implementation. Foreclosure law and bankruptcy law need to be in place and implemented before depositors’ or investors’ money sees the light of day in SME and mortgage financing.