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Business

Banks' profit-sharing mechanism questioned

KARACHI: A renowned economist, Shahid Hasan Siddiqui has questioned the mechanism employed by commercial banks on...

July 01, 2020

KARACHI: A renowned economist, Shahid Hasan Siddiqui has questioned the mechanism employed by commercial banks on disbursing profit to their PLS account holders and requested the State Bank of Pakistan (SBP) for issuance of necessary directives to the banks so that returns on PLS saving deposits are disbursed as per law.

In a detailed letter to Dr Reza Baqir Governor SBP, Siddiqui has termed the linking of rate of returns on PLS deposits with the policy rate a gross violation of Banking Companies Ordinance 1962.

During the tenure of Dr Shamshad Akhtar, the SBP, on May 30, 2008, through a BPRD Circular No. 07 of 2008, introduced Minimum Rate of Return (MDR) on Savings/PLS Saving Deposit mechanism and at that time banks were asked to pay a minimum 5 percent per annum profit rate on all categories of savings/PLS saving deposits (including any other profit bearing deposit with no fixed maturity) to all existing and new depositors, effective 1st June, 2008.

SBP issued these instructions in exercise of the powers vested upon the State Bank of Pakistan under the Banking Companies Ordinance, 1962.

As per SBP directive, the profit payable on savings/PLS savings deposits will be calculated on at least the minimum monthly balances, regardless of the bank's own minimum balance requirements. However, banks are free to pay profit rate on daily products or on an average balance basis.

Later on September 27, 2013, SBP linked the Minimum Rate of Return on Saving Deposits with SBP Repo Rate and with effect from October 01, 2013; the Minimum Profit Rate to be paid on all Pak Rupee Saving Deposits will be 50 basis points below the prevailing SBP Repo Rate (Interest Rate Corridor-Floor).

Dr Shahid has raised objection on the linkage of profit rate with SBP repo rate and said that it a violation of the Banking Companies Ordinance 1962. Millions of depositors are being "deprived" of their due share in the profits earned by banks due to linkage of return on PLS deposits with SBP repo rate, he added.

A letter sent to Governor SBP on June 8, (before the last cut in the key policy rate), he has said that State Bank "rapidly" reduced the policy rate from 13.25 percent on March 16, 2020 to 8 percent on May 15, 2020.

Accordingly, it has been observed that the rates of returns on Pak Rupee saving bank (SB) deposits secured on Profit and Loss Sharing (PLS) basis have been reduced by the banks to 11.25 percent per annum in February 2020 to 6.50 percent per annum (in May 2020). This simply means that banks will be paying over rupees Rs 325 billion less in a year to over 21 million SB account holders, he added.

"These injustices to millions of depositors have been continued by the bank due to unlawful instructions issued by SBP to all banks as contained in the DMMD circulars No 3, 4, 7 and 10 issued after the monetary policy for policy rate and floor rate", he stated.

According to him, these directives of SBP are against the Banking Companies' Ordinance (BCO) 1962.

Banks taking advantage of SBP's directives continue to "deprive" the millions of PLS depositors of their due share in the profits earned by the banks and clear violation of the Article 3 of the Constitution of Pakistan. This is also a violation of the guarantees given to PLS depositors by the government of Pakistan under section 26-A-4 of BCO 1962, he claimed.

He also claimed that the SBP directives and the way these are interpreted by banks obviously amount to a breach of trust. Islam ordains believers to fulfill all agreements, contracts, promises and commitments and it is violation of section 227of the constitution of Pakistan which says that no law can be framed against injunctions of Islam.

In his letter, he has also pointed out that SBP has not been fulfilling its responsibilities regarding monitoring performance of banks including non-sharing of bank's profit with their PLS depositors. This is a violation by SBP of section 40-A of BCO 1962, he asserted.

Banks, however, continue to declare half yearly returns on deposits by incorrectly claiming that these rates of return are "based on the operational results of the bank", he added.

Dr Shahid has also pointed out that the Supreme Court of Pakistan in SuoMotu Case No.26 of 2007, on June 3, 2011, had constituted a commission on written off loans. The commission was headed by Syed Jamshed Ali, former judge of the Supreme Court.

The provisions of SBP circular No.29 of 2002, are not only against norms of justice but are also against the partnership Act. The Supreme Court has however, not announced judgment on this SBP circular despite lapse of over 12 years' time.

Justice Syed Jamshed Ali commission, constituted by Supreme Court of Pakistan on written off loans, in its report about the returns paid by banks to their depositors observed that it is the responsibility of SBP to monitor the performance of the banking companies and in case, it inter alia finds that if a banking company is failing to protect the interest of depositors it may take remedial steps.

He has claimed that the present rate of returns being paid on Pak Rupee saving bank deposits are less than the official rate of inflation in Pakistan and exploitation of depositors. Article 3 of the Continuation of Pakistan says that "the State shall ensure the elimination of all forms of exploitation", he said.

Dr Shahid has requested Governor SBP Dr. Reza Baqir to withdraw directives for fixation of profit on PLS deposits and issue necessary directives to banks so that returns on PLS saving deposits for the half year ending on June 30, 2020 to be announced in accordance with the law.

While commenting on this issue a banker said that SBP had fixed the minimum deposit rate to facilitate the depositors as some banks were paying a very minimum rate of return on deposits despite earning healthy returns on their savings. Now the banks are bound to pay a minimum rate of return to their customers, he added.

Copyright Business Recorder, 2020