Private banking frauds

Posted on September 5, 2006
Filed Under >Bilal Zuberi, Economy & Development, Law & Justice
10 Comments
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014co1.jpgBilal Zuberi

It seems that the SECP (Securities and Exchange Commission of Pakistan) has finally decided to take strong action against CSIBL (Crescent Standard Investment Bank Limited) (See related ATP post on SECP and economic governance here). It is reported that the entire Board of Directors of CSIBL has been suspended, and its Chief Executive Officer (CEO), Anjum Saleem, has been restrained from officiating as CEO of the Bank, with immediate effect, by the Securities and Exchange Commission of Pakistan (SECP). In addition, the press release from SECP also stated that Badr-ud-Din Khan, a veteran international banker, has been installed as the Administrator.

This news has been long coming. CSIBL, and other subsidiaries of the Crescent Group, have been in the news for quite some time now for suspected fraud and irregular accounting. The fate of CSIBL, the largest private investment bank in Pakistan, was clear when on August 26 an “un-approved and un-audited” annual accounts for the year ended December 31, 2005 were published that showed a loss of Rs 2,118,546,000, or a loss per share of Rs 16.85. To the dismay of the shareholders, this meant the entire equity was eroded and the share value was thrown to a negative valuation of Rs 6.85 per share. (Source)

This episode is yet another painful reminder of the weakness of the financial regulatory and enforcement bodies in Pakistan. The scars of the Mehran bank scandal are not healed yet, and while CSIBL is now in the news, I suspect there are other institutions still operating that warrant an equally detailed investigation by SECP. This is only a symptom of a larger systemic problem.

In the boom of privatization of the finance sector, several private banks were created in the mid 1990s without setting up of adequate regulatory procedures. These banks were often established by successful Pakistani businessmen (sometimes with help from foreign funds) but a few mafiosos among them used the sudden availability of their ‘own’ banks to intimately tie up public money into complex financial agreements within large holding companies.

It wasn’t long before defaults on loans crept up and debt errors mounted into billions of dollars. In the case of CSIBL, external auditors had predicted a missing amount of over 6 billion rupees due to double book keeping and suspicious agreements with real estate and offshore companies. It is fascinating to note that CSIBL scandal was brewing along, just as the bank advertised that it was transforming itself into an all-Islamic finance bank. Additionally, it is disappointing that investigative agencies, which started their work months ago on the report of external auditors Ms A.F. Ferguson that irregularities worth billions of dollars were suspected, could only conclude with definitive action when the coffers were fully emptied out by the perpetrators.

The SECP press release said that the action had been taken after months of exhaustive investigations into the bank’s affairs, which revealed “severe and deliberate violations of legal requirements and serious financial irregularities, including but not limited to illegal maintenance of parallel accounts, concealment of bank assets, unauthorised massive funding of group companies, unlawful investments in real estate and stock market, etc”. (Source)

The SECP has directed CSIBL to cease extending financial facilities to its holding subsidiary or associated companies, which included the following: Shakarganj Mills Limited, Crescent Leasing Corporation Limited, Crescent Standard Modaraba, Safeway Mutual Funds Limited, Asian Stock Funds Limited, International Housing Finance Limited, Crescent Commercial Bank Limited, Picic Commercial Bank Limited, crescent.jpgPakistan Industrial Credit & Investment Corporation Limited, Crescent Standard Business Management (Pvt) Limited, Magrib Development Corporation (Pvt) Limited, Crescent Standard Aviation (Pvt) Limited, Crescent Brokage & Investment Services Limited, Crescent Capital Management (Pvt) Limited, Crescent Standard Business Management (Pvt) Limited, Crescent Ujala Limited, Crescent Standard Telecommunications Limited, Crescent Steel & Allied Products Limited, Crescent Modaraba Management Company Limited, Altern Energy Limited, Crescent Bahuman Energy Limited, Crescent Bahuman Limited, Crescent Sugar Mills & Distillery Limited, Crescent Textile Mills Limited, Crescent Knitwear Limited, Crescent Industrial Chemicals Limited, Crescent Group Engineering (Pvt) Limited, and Crescent Jute Products Limited.

This is not the last that we have heard of this story. It is rumored that a powerful federal minister with significant stake in the Crescent Group is also involved in this mess, whose influence in Islamabad almost led to the National Bank of Pakistan infusing Rs 2 billion into CSIBL to protect it (despite adverse reports from SECP and A.F. Ferguson). Thankfully that never materialized. This is interesting and we are watching. Will the SECP finally get some teeth?

10 responses to “Private banking frauds”

  1. laalshah says:

    The State Bank does not regulate NBFCs like CSIBL. Only the SECP regulates them

  2. Rafiq says:

    I am glad this issue is raised. There is a lot of new banks coming up but little oversight. for market to work we need a good balance.

  3. Bilal Zuberi says:

    Hey PatExpat: I agree that the State Bank of Pakistan should also have been more involved in maintaining oversight, especially since this group of companies has been rumored to be “in rough waters” for at least a few years now.
    Here’s what an editorial in Business Recorder had to say:

    Irregularities in running the bank’s financial affairs were detected last October by the SECP during the routine scrutiny of the monthly and quarterly financial statements. The CSIBL had borrowed from other institutions to the tune of Rs 5.5 billion, but it was nowhere reflected in the bank’s accounts. It transpired that the suspended management was actually maintaining a separate, parallel set of accounts for these loans to hide the company’s actual losses. Further, these loans obtained on as high interest rates as 25-55 percent, were invested in violation of the rules and regulations governing NBFIs in the stock market and real estate through the majority shareholders’ group (Crescent Group) owned companies. Such was the complexity of the transactions that their examination took A.F. Ferguson and Co some six months to come up with its report submitted to the SECP in May this year. The sponsors and directors were told by the regulators to recover Rs 1.5 billion from the group-owned companies and inject one billion rupees to save the company but they did not take steps to rectify the situation and gave incorrect reports to the SECP. The bank’s current assets are valued at about eight billion rupees against its liabilities of Rs 9.5 billion, showing a gap of Rs 1.5 billion.

    Fortunately, the CSIBL was not a very large institution and its failure would have a limited impact on the economy. We are, however, certain that the new administrator, with all his competence and experience, would be able to save the institution from default or collapse. Nonetheless, it needs to be emphasised that while the old owners should be forced to fill the gap in assets and liabilities, the depositors and other stakeholders need to be fully compensated.

  4. PatExpat says:

    Financial sector crisis occur world over and are part of a highly evolving and dynamic sector. Moreover, financial institutions do close down, become bankrupt and hoodwink the regulators until their bluff is called (even in developed economies).

    As such, I disagree with the post that its part of a larger systemic problem. The financial sector (especially banks) in Pakistan is doing quite well. To strengthen Risk Management they are following BASEL II guidelines and increasing their paid up capital to 6 billion within few years and have come a long way since the time of Indus Bank and Islamic Investment Bank saga.

    The point to be noted here is that
    1. why didn’t State Bank of Pakistan raise alarm (because SECP mainly looks at these things from Corporate Governance point of view whereas State Bank of Pakistan looks at internal processes, loan disbursements etc.)
    2. Would any action will be taken against the Federal Minister who also has a part in CSIBL’s downfall.

  5. mansoor says:

    hhhhm.. interesting…

    havent been following the news that much…. lets wait n see!

    Good change would only evolve once the regulatory bodies would get ‘teeth’ as you put it. :D

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