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Regulating Pakistan's finance


Jul 20, 2009
Saudi Arabia
I must confess, I am a novice at writing, and I have trimmed information to ensure
this piece is easily processed by anyone.

Banks are the pivots of commerce in the modern economy. Pakistan saw liberalization
of banking and privatization of national banks during the early half of 2000s. However
in spite of the early steps taken to regulate the financial markets, a lot is left to be desired.

Banks provide the financial fuel required for businesses to exist, at the same time they
provide the means of transactions between individuals and businesses. It goes without
saying that the banks provide this service for a profit. It is thus essential for the government
and her regulatory agency (State Bank) to closely monitor the ingress and egress of money.

The financial crash seen during Obama times, proved the necessity of regulation and also
highlighted the loopholes that current regulatory frameworks have and are exploited by
businesses. For the sake of this article we are only going to focus on a subset of these

The price of anything is a function of supply and demand; this rule holds true for money
like any other commodity. The price of money is depicted in the form of interest rate
that we pay. The amount of profit that a bank has to declare is on top of it's portfolio
investments and it's operational expenses (OPEX).

The above scenario may paint a daunting picture with regards to effective regulation.
Enter what is called as the core banking application to the rescue. A core banking application
electronically models every aspects of a bank's working, from retail, to consumer, to treasury
to portfolio investment. During Musharraf's time, commercial banks were forced by legislation
to adapt the core banking applications in order to protect the customer, ensure long term
stability in financial markets ( basically avoid a meltdown and runs ).

Every country requires commercial banks to abide by basic regulatory frameworks, and
monitors them strictly in real time. To ensure financial transparency it necessary that all
aspects of a bank's business transactions are modeled holistically, accurately and truthfully
in the core banking system; then it is necessary that the output of these systems is
monitored accurately by the central bank (State bank of Pakistan).

Before moving forward, we have to understand and appreciate the revolution that we have
witnessed in recent years in terms of digital banking channels. For the sake of this article
we will focus on one S.W.I.F.T.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT), legally S.W.I.F.T. SCRL, provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.
In ordinary terms, S.W.I.F.T gateway is what is used to transfer money internationally; newer
blockchain initiatives pose some competition to international settlements, however at least
foreseeable future, SWIFT will remain dominant legally accepted channel.

With this prelude lets examine the problems that have plagued Pakistan in recent years and
their solutions which are much simpler than one would expect. lets start by examining the
role of state bank.

The State Bank's Governor is a political appointment. This in itself shall indicate the importance
political parties attach to getting their guy in that job. The reason is to keep State Bank in a
complete state of comma; thus allowing commercial banks autonomy beyond reason.


Above diagram depicts the desired relationships between different entities; and is discussed below:

NADRA must be established as the single source of truth in the country. Thus any one opening,
or operating a bank account must actively be established as legal citizen or business.

SECP along with relevant ministries of commerce and industries must establish a record of
valid businesses in Pakistan, their nature of business. Furthermore along with ministry of
interior and human resources, must establish employee database of every business.

FBR must establish oversight into the transaction information being generated both internally
as well as intentionally between individuals as well as between businesses.

Commercial Bank must ensure that all it's business is accurately captured in, and conducted
through the core banking application.

State Bank has to ensure that the configuration employed at the commercial bank level
is the same as required; and no information is withheld or corrupted.

It is pertinent to say, that although some level of information exchange is present between
the relevant entities, it is much below the desired level. It is further important to note that
standards, software solutions, practices and procedures already exist and are in practice
all over the world. Thus only leaving political desire for success.

The problems this setup is going to solve are numerous. We are not going to talk about
core financial reporting, and banking standards. We will take one case only which is Taxation.

Firstly, State Bank and by it's virtue the ministry of interior as well as FBR will have full vision
of all financial assets in the country, and will be able to link them to the proper owners.
This will eradicate the situation of Be-Nami accounts that we have seen. Moreover FBR
will have the visibility into the trail of transactions that will prove business relationships
between different entities.

The maintenance of information between human resources and NADRA record, will ensure
that the salary payments of all employees of any given business are traceable. This ensures
that the employees are paid as per the contract by the employer. This will also ensure that
the financial reporting of any business is within acceptable accuracy since the OPEX of that
business will be visible to FBR. Thus declaring profit or loss, or their respective magnitude
will be more accurate than before.

Lastly, the visibility into the transactions made through S.W.I.F.T will come to light, and state
bank will be accurately able to trace financial transactions into the country as well as out of
the country.
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