Islamabad, July 26:

Pakistani banks are taking advantage of a weak regulatory framework to form cartels and rake in windfall profits, a new report says.

“The most important issue is that Pakistan has one of the highest interest rate spreads in the world,” said Hamid Siraj of the non-profit NGO Consumer Rights Commission of Pakistan (CRCP) while commenting on the report, Dawn newspaper based here reported today.

CRCP and Asia Foundation have jointly authored the report, titled ‘Consumer financing in Pakistan: Issues, challenges and way forward’. According to Siraj, an analysis of the interest rate pattern in Pakistan showed the spread had vacillated between 5.95 and 9.58 per cent during 1990-2005. In recent years, the spread has exceeded seven per cent.

The report says the high interest rate spread indicates competitiveness in banking sector in Pakistan is either absent or very poor. This is largely due to weak regulation of interest rates despite the fact that the State Bank of Pakistan (SBP) has powers to control the spread through its monetary policies.

“While non-operating loans and high administrative costs could be major reasons in countries where the spread is high, these cannot be said to be true of Pakistan because banks are earning huge profits at the cost of savings of depositors,” the report says. “High interest rate spread is damaging competitiveness in the economy in general and in the financial sector in particular,” it adds.

The report says the SBP should exercise its powers to fix a reasonable rate of return for banks as well as depositors. As a matter of priority, interest rate spread should be reduced, at least, to the level of average spread in South Asia.

“The banking sector is earning record profits by charging unrealistic and exceptionally high interest rates. As a result, despite considerable ratio of non-performing loans, annual profitability of banks has reached 76 per cent on an annual basis,” the report says.

“This is evident from the pre-tax annual profit of all banks, which was Rs.7 billion in 2000 and jumped to Rs.123.4 billion in 2006. In recent months, deceleration trends are on the rise in consumer financing due to increasing loan default and use of credit worthiness information by the banks,” it adds.

Another critical issue, according to the report, is that almost all consumer loans are on the basis of variable mark-ups, which has reduced the loan-servicing capacity of borrowers due to progressive increase in the rates. “In addition, the growth in consumer financing has put extremely great inflationary pressure on the economy,” the report adds.