Banks should prioritize customer trust

The recent decision by several banks in Pakistan to impose fees on high-value deposits has sparked a nationwide debate regarding its ethics, legality, and economic ramifications. Effective December 2024, these banks will levy a 5% monthly fee on deposits exceeding PKR 5 billion, a move aimed at addressing liquidity challenges and improving their advance-to-deposit ratios (ADR). However, this decision has raised several concerns about its fairness and its long-term impact on the banking sector and economy. Contractual agreements govern banking relationships, which define the terms and conditions for opening and maintaining accounts. Imposing significant fees on large deposits, without prior consent or notification, represents a unilateral amendment to these agreements. Such actions violate fundamental contract law principles and erode trust between banks and depositors. The imposition of fees exclusively on high-value depositors raises concerns about inequality, potentially violating Article 25 of the Constitution of Pakistan, which guarantees equality before the law. While the State Bank of Pakistan (SBP) has issued guidelines on service charges related to additional banking services, there is no clear regulatory framework governing the imposition of fees on basic banking services, such as accepting deposits. The absence of such clarity raises questions about the legality and fairness of these fees, especially when there has been no comprehensive regulatory guidance. Banks are legally obligated to manage customer funds in a way that prioritizes the depositor’s best interests. Imposing fees without offering any additional service or justification risks alienating customers. Such actions could contribute to a broader erosion of trust in the banking system. Trust is the cornerstone of any banking system, and penalizing high-value depositors could undermine this trust. Businesses and wealthy individuals, who are typically responsible for a significant portion of bank liquidity, may view these fees as a sign that banks no longer prioritize their needs. This could lead to a shift away from the formal banking sector towards alternative financial solutions or even cash-based economies. The global banking landscape rewards high-value depositors with preferential interest rates or specialized services. The decision by Pakistani banks to impose punitive fees on these depositors could diminish the country’s competitiveness in attracting foreign and high-net-worth deposits. Pakistan’s banking sector has been under criticism for over-investing in government securities at the expense of lending to productive sectors of the economy. This strategy stifles credit availability for businesses and households, limiting economic growth. The fees appear disproportionate to the services provided by the banks, especially considering that these banks have not shown any additional benefits or improvements in service that would justify such charges. The fees disproportionately burden high-value depositors without a clear operational necessity, which undermines the fairness of the policy. Instead of penalizing large depositors, the focus should be on introducing innovative, business-friendly financial products that could stimulate economic growth and improve the ADR in a more sustainable way. To address the liquidity challenges, it would be more beneficial for banks to focus on aligning with global best practices. Incentivizing high-value deposits by offering preferential interest rates or customized financial services to attract and retain large depositors, rather than penalizing them. Enhancing the role of banks as financial intermediaries by investing more in private-sector loans and productive investments that contribute to economic growth, rather than relying primarily on government securities. Building depositor confidence through transparency, clear communication, and policies that reflect the broader interests of economic stability and growth, rather than focusing on punitive measures. Banks should prioritize customer trust, align with global banking practices, and fulfill their critical role in financing productive sectors of the economy. The State Bank of Pakistan must act swiftly to provide clarity and guidance on this matter to ensure that the banking system remains robust and transparent.