Open and Collaborative Governance
Easy access to information, especially through mobile phones and the social media, has enabled citizens to give their feedback on governance-related issues.
What new measures did you introduce at the State Bank of Pakistan?
The State Bank of Pakistan (SBP) and the banking system had been functioning like subordinate departments of the Ministry of Finance up until 1993 and the banking system was at the verge of collapse due to mismanagement. From 1993 to 1999, legislative reforms were introduced at a scale unprecedented in the banking history of the country. The SBP was made autonomous de jure, the monetary policy was freed from the shackles of the MoF, the Pakistan Banking Council was abolished, banking supervision capabilities of the SBP were strengthened, the grip of trade unions on banks was broken, the capital base of publicsector banks was strengthened and their governance improved to make them ready for privatization, corrupt bankers were successfully removed and prosecuted and the management of commercial banks was given to professionals.
Unfortunately, subsequent SBP managements did not adhere to the reformed framework and the SBP and the banking system have drifted back
de facto to the previous position of subordination to the MoF with its associated adverse effects. The world’s mature economies have not handled themselves as well as they should have. Do you agree with this?
I agree. While the central banks of the developed countries have become more effective and coordinate their policies well to handle international financial crises, governments in several developed countries have indulged in wasteful spending and avoided tax reforms. As a result, they face unmanageable external debt, a slowdown in economic growth and high unemployment. Do you think banking is a flourishing sector in Pakistan? What are your thoughts on Islamic banking?
Commercial banks have reaped huge profits in the recent past, taking advantage of three things. First, government borrowing from commercial banks gave them an opportunity to make profits without facing the threat of debt defaults and without having the urgency to mobilize additional deposit resources. Second, the SBP failed to improve governance of banks by reducing the influence of large shareholders in the business of running banks on a dayto-day basis and their manipulations contributed to rising profits at the cost of small depositors and genuine borrowers. Third, the SBP did nothing to reduce the interest spread and the banks were able to mint huge profits by giving negative real rates of return to deposits. In the process, the banking system became instrumental in transferring resources from the poor depositors to the rich borrowers. Only a strong SBP and strong prudential regulations can rectify the situation.
Islamic banking is in name only. The real Islamic spirit behind prohibition of fixed rate of return on lending was to stop the exploitation of the poor borrowers by the rich money lenders. In Pakistan, the cover of Islamic banking is used by banks to exploit the poor depositors to make huge profits. How successful has micro-banking been in Pakistan?
Not very successful. The reason is that banks feel comfortable only in dealing with established businesses and large companies for lending purposes and do not wish to spread the scope of lending to small and medium borrowers who have difficulties in meeting their collateral requirements. Lending on the basis of collateral, rather than cash-flow analysis, is the easiest course of action and banks do not wish to depart from that. practice unless the SBP was to initiate the process in a big way. What future do you see for foreign banks here, considering that a number of them have already left the country?
Our domestic banking system is quite developed and there is no reason why the country should depend on foreign banks for its general banking business. In fact, the short-sighted approach of our past governments to sell domestic banks to foreigners to gather some foreign exchange to tide over short-term scarcity of foreign exchange reserves has created a situation in which there will be heavy transfer of profits abroad by foreign-owned banks. Both from the point of view of national security and economic independence, the government should avoid selling any more domestic banks to foreigners or allowing foreign banks to do ordinary banking business through branches spread all over the country. However, foreign banks should be welcome to open a few branches for foreign trade financing in big cities. The World Bank has suggested that Pakistan should grant the status of the Most Favored Nation to India and that the two countries must sign power transmission and trade agreements. Do you approve of this?
Leaving aside the political aspects of their relations, both Pakistan and India can benefit from expanded trade between them. The problem is that normalization of economic and trade relations is not plausible without progress on the security and political fronts. Not much can be expected on the trade side without meaningful progress in resolving the outstanding disputes through peaceful means.
Astatement on the homepage of the World Bank Institute (WBI) reads: “More than one billion people do not have access to clean water, electricity, and other services crucial for their health and livelihood. Failures in service provision have been linked to poor governance, the lack of transparency and access to public information, weak accountability relationships, and low levels of citizen participation. The main challenge that often confronts countries attempting to undertake governance reforms is not "What" (what is the problem and what are the remedies for it?) but “Why” (why does the problem persist?) and “How” (how to manage