The burden of over-regulation

In this edition of Profit, both our cover story and one of our main feature stories are about the financial services sector, and how the government’s desire to regulate businesses has tended to have the effect of stifling progress. In the case of our cover story, we explore the State Bank of Pakistan’s Prudential Regulations that are – in theory – designed to keep the banking sector safe for depositors but in reality have the effect of essentially infantalising the entire banking sector by having the central bank take over risk management for the whole sector.

We believe that a more sensible balance needs to be struck between the need to protect borrowers and the overall health of the financial system on one hand, and the needs of borrowers and small businesses to grow the economy and employment opportunities on the other. The current situation is unsustainable and the State Bank knows it. So why are they not acting?

The reality is that the central bank has nothing pushing them to do so. Small businesses do not have a strong lobbying voice in Islamabad and the largest businesses – which do have a voice – already have access to capital and financing, and hence do not feel the need to push the government to change the regulations. Indeed, they benefit from the status quo, since it prevents their smaller rivals from ever getting the capital they need to achieve scale and seriously threaten the larger incumbents.

Yet if this economy is ever to become more egalitarian, and truly provide equality of opportunity, then the rules as they currently stand must change. The central bank cannot continue to treat the banking sector like children in need of strict supervision over even the minutiae of running their businesses. It must allow greater flexibility, which in turn will likely spur competition amongst the banks for the opportunity to lend to some of Pakistan’s most promising businesses.

Banking regulations are hardly the stuff of riveting reading, but we felt it was important enough to the health of the economy to put the issue on our cover for this issue. We hope that the regulators – and the bankers – will realise its importance and move towards making the necessary changes.

Farooq Tirmizi
Farooq Tirmizi
Contributing editor for Profit @ Pakistan Today

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