Systemic risk lurks ahead, says Habib Bank CEO

KARACHI: The banking sector will be exposed to “systemic risk” if the prevailing uncertainty continues for another few months, Habib Bank Ltd Managing Director Muhammad Aurangzeb said on Friday.

Speaking at a summit on financial crime, the CEO of the biggest commercial bank warned attendees of a “big hit to the economy” if stakeholders did not make the right decisions quickly.

“Even the smallest institution or the largest country (needs) timely decisions, timely execution. We are not going to withdraw from the IMF (International Monetary Fund) program… Whoever comes (to power) after the elections will have to deal with the IMF,” he said.

The government has been dragging its feet on structural reforms such as energy tariff adjustments for many months. Its reluctance to take tough decisions has led to inordinate delays in disbursing funds from the IMF. The resulting shortage of dollars has been so severe that the country is finding it difficult to import even the bare essentials, such as food and energy. Banks do not have the funds to open letters of credit for the industrial sector, which has announced a series of shutdowns due to non-availability of industrial raw materials.

“If you look at the last 18 months, IMF on, IMF off,” Mr Aurangzeb said in a moment of exasperation. The prolonged spell of indecision on the IMF issue is causing “financial stress” even as banks have “kept the show on the road” in terms of funding, he said.

The best way to fight financial crimes is to improve transaction monitoring and strengthen the know-your-customer (KYC) regime, he said. “It’s the banks’ first line of defense,” he noted.

Speaking on the occasion, serial entrepreneur Nadeem Hussain said opening a business account takes about two months on an average given the extensive documentation requirements.

“This is a travesty,” he said, noting that the Securities and Exchange Commission of Pakistan (SECP) should be able to help banks verify the credentials of business entities in real time.

“When it comes to fraud, Pakistan has been lucky compared to the rest of the world. We are one of the few countries that have an electronic biometric verification process. In theory, if the process is followed… there should be no scope for faluda accounts,” he said while referring to bank accounts with significant deposits, even though the accounts are people with seemingly minimal financial means.

Noting that there was “no reason” for the existence of dubious accounts, Mr Hussain said there had been many such cases in the recent past, mainly due to the collusion of criminals with rogue employees at the branch level.

A leading microfinance bank took an impairment charge of around Rs 14 billion after it found “irregularities and fraud” in its loan portfolio in 2019.

The bank had to verify almost half a million borrowers to ascertain who actually existed, whether their ability to repay was intact and whether there was any irregularity in the way the loans were made. It even stopped issuing new loans for nearly a year and a half while it cleaned up its books.

“The fraud related to bank accounts can be greatly reduced if the process is followed,” said Mr Hussain. He suggested establishing a centralized KYC process where every bank has access to verify that another bank has done in the past to any customer.

The SECP has already put in place a centralized KYC regime for mutual funds. The State Bank of Pakistan should follow suit for bank customers, he added.



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