Political influence on the banking sector of Pakistan
Banks in Pakistan have been catering basically to the needs of the Government, public sector organizations, serving a few large corporations and engaging in trade financing. There was no lending to small and medium enterprises, to the housing sector or to the agricultural sector, which create most of the growth and employment in Pakistan. Most important, the financial system suffered from political interference in lending decisions and also in the appointment of the Boards and Chief Executives. The middle class which is the backbone of any economy was not given due attention by the banking sector. There were several legitimate reasons for such an errant behavior.
First, the government's fiscal deficit was so high that most of the deposits the banks used to get were loaned to the government and government corporations. This was safe lending which fetched good returns and the banks made good profit out of it. Naturally, there was little incentive for them to do anything else except lend to the Government which was both risk free and highly remunerative.
Secondly, the government owned most of the banks. In the government banks the staff worked like typical government employees, coming to office at 9:00 a.m., checking files; having nothing important to do and leaving at 5.00 p.m. without doing much work. These banks suffered from a high bureaucratic approach, overstaffing, unprofitable branches and poor customer service. Administrative costs were high reducing profits of depositors.
Thirdly, recovery rate was so low that almost 25% of the loans were stuck up. A large number of loans to the private sector borrowers were not given on the merit of the proposal but on political considerations. These influential borrowers hardly repaid their loans.
Fourth, banking industry faced a high tax rate of 58 percent while the rest of the corporate sector paid only 35 percent. This high punitive rate along with the burden of stuck loans and inefficiency of the staff was passed on to the customers in form of high lending rates and low deposit rates. The banking industry was not attractive for new entrants who could foster competition and improve efficiency. Because of these factors, i.e. high administrative costs, burden of stuCk-up loans and excessive tax rates, the average interest rate for lending was about 21% per annum. The middle class borrowers could not afford to get credit on such high interest rates and pay it back.
