Pakistan’s most profitable sector of the economy would have to be banking.
In 2024, Pakistani banks collectively earned over a staggering Rs 600 billion in profit after tax, led by Meezan Bank which earned a record Rs 104 billion in after-tax profit. Other banks like HBL and MCB made after-tax profit of Rs 57.8 billion and Rs 63.4 billion respectively.
For this much profit to be generated, one can only imagine what kind of revenue the country’s banking sector must be generating. In 2024, banks had revenues or income of Rs 2.46 trillion. This was divided into two parts: net interest income (the difference between the interest it receives on loans given, mostly to the government, and the interest it pays to deposit holders), which was Rs 1.9 trillion, and non-net interest income, which was Rs 560 billion.
In other words, it is a good time to be a shareholder of a bank’s stock. In 2024, most banks gave generous cash dividends to shareholders thanks to their record profits.
Banks clearly have an obligation to their shareholders, and this is why they are always in pursuit or more and more profit. Because that will keep their shareholders happy and content. The spread for banks in Pakistan is very lucrative, meaning that they earn far more interest income on the loans that they give than the interest they have to pay to deposit holders.
Of course, all this necessarily comes at the expense of the banks’ account holders/customers. It would be fair to say that the banking industry in Pakistan operates more or less as a cartel. And that would explain the obscene profits that the sector makes. In fact, basic economics tells us that when an industry has firms that make a lot of profit, that is proof of the fact that they are acting as monopolies, oligopolies, the latter being essentially a cartel.
It would be fair to say that the banks make so much money by lending to the federal government that they basically can do without small account-holders
So while it’s clear that the shareholders are obviously going to be very happy with how the banks are doing, the same cannot be said of the general public which has accounts/deposit with the banks. By and large, the level of customer service seen at top banks in the country leaves much to be desired.
Account-holders are often made to wait for a long time for simple tasks as cashing a cheque or making a deposit. And many times, the wait is so long, they end up wasting hours of their precious time. Of course, one way to rationalise is that those customers who don’t have bank accounts with large balances aren’t making much, or in fact any, money for the banks. The bulk of income that banks earn is by lending funds and charging interest on them, and the biggest lender of the banks by far is the federal government. It would be fair to say that the banks make so much money by lending to the federal government that they basically can do without small account-holders. And that might help explain why so little attention is given to the quality of service at bank branches across the country, since the bulk of those who usually go to a bank branch happen to be those who have small or basic banking accounts.
Basic banking accounts do not have a minimum balance requirement and hence suit people with small or no regular income. And banks are required to offer them to the general public following a directive by the State Bank of Pakistan dating back to 2005. Of course, the central bank, and industry regulator, also needs to do its bit for safeguarding the rights of the general banking public. One way it can do that is to press banks to improve their customer service standards and require them to devote a certain proportion of their profit towards training staff whose primary job is in public dealing.
As for government lending (which leads to the ‘crowding out effect’ – where private investment is affected since banks don’t lend much to the private sector), the only realistic way forward would be for the government to get its finances in control and that will automatically lead to a reduced demand for government borrowing (generally governments borrow to finance their fiscal deficit – which means they borrow to spend). That said, it would be good if the State Bank were to goad commercial banks to lend more to the private sector since that kind of lending leads to increased investment spending and hence greater GDP growth.