Sindh Bank - Retrying A Failed Formula

By Amir Zia
The News
Fabruary 13, 2011

It is not the government's job to run commercial entities. Its job is to provide an enabling environment where businesses, trade and industry can grow amidst healthy competition

It is a tried and tested formula, which failed to deliver in the past, yet the Sindh provincial government still wants to try it. Yes, a new public sector venture - the Sindh Bank - is all set to commence its formal operations, signifying the confusion and the lack of direction in the government’s economic policies at every level.

The controversial decision of setting up Sindh Bank came despite the fact that similar experiments of operating banks by the provincial governments of Punjab and the Khyber-Pakhtunkhwa turned out to be costly and disastrous affairs. But in Pakistan, rulers hardly learn from the past.

The Sindh government has committed 10 billion rupees to meet the State Bank of Pakistan’s minimum paid-up capital requirement for the Sindh Bank, which plans to open 50 branches by the year-end. The new bank, the fifth public sector commercial bank, will focus on the agricultural sector and small and medium enterprises. But why can’t the existing banks, that also include the specialised Zarai Tarraqiati Bank and the heavyweight state-run National Bank of Pakistan, perform the task remains an important question that the provincial government needs to answer in a rational way.

The idea to “serve people” through depositors’ money remains flawed in its essence. This has been proved beyond doubt. The government should mobilise resources through taxes to do this, rather than trying to run a commercial entity.

According to a senior SBP official, both the Bank of Punjab and the Bank of Khyber suffered because of “mismanagement, political interference and violation of credit policy guidelines.” The central bank authorities claim that the “bad experience” of the two provincial banks led them to introduce stringent conditions and policy guidelines for the Sindh Bank that include a demand for the appointment of professionals on key management positions and setting a higher bar for the board of directors, but they admit that monitoring a public sector bank remains an uphill task. In most cases, it is after months that any violation of rules and regulations appears on the central bank’s inspection radar.

Given the allegations of rampant corruption and nepotism at the top government level, how will the Sindh Bank ensure transparency in hiring and operations and prevent political interference? These also remain burning questions.

As far as getting top professionals in the Sindh Bank’s management team and board of governors is considered, the start has not been that encouraging. The board of governors is headed by the Sindh chief secretary ñ hardly a person to claim that he knows the banking business. The other government nominees in the board include the provincial additional chief secretary and finance secretary with a sprinkling of the private sector representatives. The management team is yet to be completed and put in place.

Syed Sardar Ahmed, the Muttahida Qaumi Movement’s (MQM) parliamentary leader in the Sindh Assembly, who himself was a senior bureaucrat, said that bureaucrats do not have the expertise to guide a bank. The MQM, a coalition partner of the PPP, opposed the bank, saying that it was not the government’s job to run commercial organisations. Instead it proposed setting up a microfinance bank, which could benefit the poorest of the poor in large numbers, but the suggestion has been overruled.

On a broader policy level, the opening of a new public sector bank reflects poorly on the government’s economic vision, which at least on paper aims for deregulation, liberalisation and privatisation. There has been a broad consensus on these three economic pillars among all the major political parties and the establishment since the early 1990s that led to financial sector reforms and privatisation of major banks over the last two decades.

The policy paid dividends in more than one way. The privatised banks transformed into profit-making institutions from those, which were a burden on the national exchequer because of overstaffing, over-branching, huge portfolio of the non-performing loans and political interference. The financial sector reforms also led to an improved customer service, diversification in the product range, better management and transparency.

It is strange why the government plans to expand its stakes in the financial sector where its past involvement brought nothing, but scandals, poor performance and big losses. The key existing public sector organisations already remain a huge drain on the government, which provided 250 billion rupees in subsidies to just eight of these entities in fiscal 2009/10 to keep them afloat.

In the current fiscal year, the trend has not been reversed as these institutions — plagued by overstaffing, corruption and mismanagement — continue to inflict billions of rupees losses every month.

This brings us back to the fundamental issue that it is not the government’s job to run commercial organisations. Its job is only to provide an enabling environment where businesses, trade and industry can grow amidst healthy competition. The government needs to act only as a regulator and swing into action to prevent any excesses committed by interest groups or market failure.

Therefore, it is necessary to snap the government’s direct control over businesses given the history of our politicians of interfering in the affairs of the public sector companies. It is not just a question of greed and corruption; elected representatives often yield to the pressure of their supporters, who demand jobs, posting and contracts. It remains imperative that the rulers focus on their core job of running the government rather than dabbling in business ventures. The peoples’ representatives, however, appear adamant to do the opposite and yet hope for positive results. How ironic!