The saver pays—II

Pakistan’s banks are strong, profitable and protected. Its financial system is shallow. Zafar Masud blames “the field”: the deficit, informality, a narrow tax base. But that field was laid out largely by bankers, who have run the finance ministry, sat on the central bank’s board and staffed the regulators for a quarter of a century. Today banks hold 83 percent of government securities, and their investments exceed their deposits. Entry is rare, exit is by absorption, and every rival route for money passes through a bank. Someone pays for that arrangement. It is the saver.

Financial repression

This is financial repression, and the saver is its tax base. The regulator once said so itself. In 2008 SBP had to order banks to pay savers a minimum return, because their market power let them pay next to nothing; the gap between the policy rate and what savers earned had been around nine and a half points.

It has spent the past two years taking that order apart. From January 2025 the floor stopped applying to corporate and institutional deposits, which make up over half of listed banks’ deposits. From August this year it no longer covers trusts, private companies or any individual balance above Rs10 million. The financial press called it what it was: compensation to banks for their heavy taxes, paid by depositors.

The damage is plainest when inflation bites. In May 2023 inflation reached 38 percent. The policy rate stood at 21, and deposit rates sat below that. Savers lost roughly a fifth of their money’s worth in a year, quietly, through the bank channel. Real deposit rates are positive again today. The structure that made that loss possible is untouched.

SBP will point to InvestPak, launched in July, which lets anyone buy government securities online from Rs5,000. It is welcome. It is also thirty years late. It offers only the state’s own paper. It runs on bank accounts. And it came in the same circular that withdrew depositor protection, on the argument that savers who can buy T-bills no longer need it. One door opened onto the government; one safeguard closed. The roads that would let savers back private enterprise, a wallet that pays interest, a finance company taking term deposits, an independent fund, a corporate bond, remain shut or routed back through a bank.

So the saver goes to sleep, or escapes. Currency in circulation closed FY2026 at nearly Rs12 trillion, an all-time high. Plots, gold and dollars take much of the rest. Capital that could finance firms sits idle.

Easy banking

For the banks this is easy banking. Deposits are cheap and captive. The sovereign borrows at double digits. There is no need to hunt for borrowers, price risk or invent products. The 2024 ADR tax showed they can lend when pushed. Most of the time nothing pushes them.

The state has its own reason to leave things alone. In the first half of 2025 banks paid 54.5 percent of their pre-tax profit in tax, the highest share in years. A treasury that takes more than half of bank profits has every reason to keep those profits fat. Masud complains about the tax. He should notice what it buys: a government with a stake in the very arrangement that starves private credit.

None of this needs a conspiracy, and I drop the word cartel. A protected oligopoly needs no secret meetings when the state borrows at its own auctions and absorbs most of bank assets. Masud’s own figures make the point. Net interest margins fell from about 5.8 to 4.5 percent as the policy rate came down from 22. Profits that track the sovereign’s borrowing cost are earned from the sovereign. His comparison with London banks borrowing from the Bank of England to buy gilts misses the scale. In Britain pension funds, insurers and foreigners hold much of the gilt market; bank carry is a side-line. Here it is the business.

His three proposals

Masud ends with three proposals. A statutory ceiling on government borrowing from banks will not work, any more than debt ceilings have; a government that needs money finds a way around a number. On tax we agree that the system is confused and leans on high, arbitrary rates. But lower rates for banks are not a tax policy, and the network that supplies our finance ministers is best placed to push for a broad-based one. His public first-loss guarantee for documented borrowers puts the risk on the state and leaves the structure of the industry untouched.

What should change

Reopen entry. Publish licensing criteria and decision deadlines. Admit specialised institutions, an SME lender, a mortgage bank, a regional bank, with capital scaled to their risks rather than one Rs10 billion bar. Graduate the digital banks that are ready and license the next round.

Allow exit. Resolve weak banks through the deposit protection scheme: depositors protected, shareholders wiped out, no shotgun marriages to the biggest balance sheet. Have an autonomous, professionally-run Competition Commission scrutinise every bank merger.

Open the debt market. Admit non-bank primary dealers. Give pension funds, insurers and asset managers direct auction access through CDC.

Let non-banks compete for savings. Let e-money institutions hold float in T-bills and share the return. Let well-capitalised NBFCs raise term deposits and commercial paper within prudential limits. Give every licensed lender the same access to credit-bureau and payments data that banks enjoy.

Restore the saver’s floor until real competition for deposits exists, rather than dismantling it first and hoping competition follows.

Separate making funds from selling them. A bank that distributes mutual funds should offer third-party funds on equal terms and disclose what it earns on each sale.

Make foreign exchange contestable. Let exchange companies settle directly through Raast, scale rules to risk, and publish spreads.

Light up the revolving door. Disclose board and policy appointments, and set cooling-off periods between bank boards, the central bank and the finance ministry.

Before any of this, commission a market study of banking groups across lending, funds, foreign exchange and government securities, by the Competition Commission and SECP with academic economists, publishing fees, spreads and market shares. If the industry is as open as Masud believes, it has nothing to fear.

The shovel

Masud says blaming banks for government borrowing is like blaming the reservoir for the size of the dam. It is a good image. But reservoirs do not go to court over their tax bills, negotiate their own regulation, or send their alumni to run the ministry that builds the dam.

Privatization was meant to give us a system that gathers savings, pays depositors a fair market return and puts the money to work in enterprise. It gave us sound, profitable banks instead. That is half a reform. I do not want it reversed. I want it finished. The people who laid out this field are the obvious ones to pick up the shovel.

Copyright Business Recorder, 2026