2018 proved to be a critical year for the banking sector of Pakistan which exposed its hidden weaknesses in operations including non-compliance of regulations and ways of doing business.
The banking system not only failed to mitigate risks and losses at the domestic level but it performed poorly at the global level through its foreign operations.
Fake Bank Accounts
In 2018, some shocking and interesting trends started emerging when billions of rupees were found in the account of a falooda seller who had not even seen the inside of a bank branch in his life. There are many more such shocking stories that were revealed by the intelligence agencies this year, which also estimated that an amount of Rs. 200 billion were managed under fake accounts.
This showed that local banks are maintaining innumerable fake accounts with billions of rupees and violating rules and regulations of the central bank to manage their systems.
Federal Investigative Agency (FIA) recently revealed various fake accounts under the name of 171 high profile personalities who were recently put on the Exit Control List (ECL). Among them, various bankers were involved belonging to Sindh Bank, National Bank of Pakistan and Summit Bank.
In 2018, fraudsters found a way to siphon off from customers’ accounts from various banks in Pakistan. They used phone calls and web-links to tactfully get the personal and confidential information of the bank’s customers and stole money from their accounts easily.
Finally, the central bank came up with a hotline to prevent this, and trace the whereabouts of the criminals. The Central bank and commercial banks finally woke up to run an awareness campaign for the customers through SMS and websites.
State Bank of Pakistan (SBP) issued directives for banks on electronic payment services. SBP made it mandatory for them to send each transactions’ details to their customers through free SMS. Besides, banks will compensate their customers within 48 hours in case of online scams.
Banks Fail To Meet Regulatory Requirements
Four banks have yet to meet the regulatory requirement of paid-up capital, which is Rs. 10 billion. These are Summit Bank, First Women Bank, SME Bank, and Bank of Punjab. These banks were the only banks failing to meet the requirement in 2017.
SBP further revised the Minimum Capital Requirement (MCR) for all commercial banks who are now working to raise their paid-up capital before the set deadline.
Sindh, Summit Banks’ Merger
The merger of the Sindh and Summit Bank was scheduled to have completed in the beginning of 2018, however, the process was held in abeyance by the Supreme Court of Pakistan (SC) for its review.
The merger of the two banks was seen highly critical after the names of CEO and Chairman of the two banks were put on ECL in the recent days. Summit Bank’s top leadership was even arrested, and are now being investigated.
Biometric Re-verification of Banks’ Account Holders
The saga of fake accounts and account holders proved to be a silver lining for the banking industry. All commercial and microfinance banks have undergone a challenging task this year and will verify their account-holders till the mid of the starting year.
The biometric re-verification process is a major corrective drive which will not only decide the actual base of the country’s bank account holders but it will also reveal flaws in the banking mechanism and practices of bankers. Out of a total 50 million accounts, many of the dormant accounts made in the past many decades are likely to be closed off.
Banks’ Suspension of Credit Cards Service for International Transactions
As the news of online scams made headlines, many customers became highly conscious of their online banking transactions. The news of a security breach of a Pakistani bank badly shook the confidence of customers when it came to the electronic banking system. It took some time for things to stabilize.
The cybersecurity readiness of Pakistani banks (or lack thereof) was badly exposed in 2018. In a major security breach, the data of customers was hacked and an estimated amount of $6 million was illegally transferred to an unidentified location.
In the subsequent days, almost all commercial banks suspended their credit cards service for international customers for many days. High-end customers particularly frequent travelers, traders and tourists were seriously hurt from the suspension of this service.
Closure of Foreign Branches
After the closure of Habib Bank’s branch in New York, United Bank Limited (UBL) also announced to shut down its operations in the US market. The bank is winding up its operations after it decided not to meet some stringent requirements laid down by the New York authorities.
Bank Alfalah Limited also announced this year to shut down its operations in Afghanistan. The bank is advancing its negotiations to sell off its business to Azizi Bank. The bank is in the final phase of this process.
Bank Al-Habib Limited rolled back its operations in the Hong Kong market this year. The bank acquired a license to operate its subsidiary AL- Habib Credit and Finance, however, it revoked its plan to further scale up its operation and business in Hong Kong.
Bank Profit Drops Steeply in Local and Foreign Markets
A majority of the local banks faced a significant drop in their profit growth in 2018. According to SBP, the banking industry’s profits dropped by 14.6 percent by the end of the first half of 2018. The banking industry lost a whopping amount of Rs. 13.2 billion on the account of profit growth in the local market, with the overall profit standing at Rs. 76.2 billion. Very few banks including conventional and Islamic banks managed to book some growth in profits so far in 2018.
Local banks with foreign operations also faced a tough time in different countries. The overall profit of the Pakistani banking industry dropped by 41 percent or Rs 2 billion in its overseas market. Its profit stood at Rs. 2.8 billion which was earlier reported Rs. 4.8 billion and Rs. 5.9 billion during the same period in 2017 and 2016 respectively.
Besides these major challenges encountered by Pakistani banks, there are many other issues being faced by the banking sector such as the availability of trained human resources, the rising cost of operations, non-performing loans, etc.