The shroud over banking operations

Despite all the fuss there has been about how investment banks operate in an environment notorious for its lack of transparency, the fact remains that they are highly secretive about how they earn profits.

Although central banks across the GCC have been persistently asking banks to improve their disclosure norms, little is revealed about which products are making money, the type of client, whether the earnings are primary or secondary, whether the earnings are proprietary or client driven.
Fear of giving away secrets to competitors is the banks’ excuse to remain shut out. Regulators may get to see a more detailed breakdown of bank performance but certainly investors have little to go by when making buy or sell decisions. Surely it is time things improved.
Within the GCC, some commercial banks whose main activity had been financing share purchases, turned stock investment banks and burned their fingers after the stock market crash.
Before the stock slump, the detailed results of many banks showed that 90 per cent of their profits were being generated from share trading and a mere 10 per cent from their business operations.
Bank managements are also required to consider a new strategy that conforms to the objectives for which they have been established.
This is needed because the increasing competitive nature of the local market demands working out new business strategy and standards.
For banks, the core profit areas are mainly in consumer lending, credit/debit cards, insurance, investment banking, private wealth management, equity-and-debt financing and offering high-tech instruments, such as derivatives, the trading of credit, interest rate and foreign exchange risks.
Many big players boast diverse “product-lines” ranging from retail/wholesale to corporate and treasury services, catering to the needs of a sophisticated clientele.
In retail banking, unlike many other retail industries, the pricing of banking services is shrouded in secrecy.
What do customers really pay for a current account, other products or their overall relationship with the bank?
While banks across the world may be becoming more transparent in disclosing their charges, for most customers the true costs of many services are hidden amongst a maze of banking jargon and fine print.
In this context, the Central Bank of Bahrain (CBB) has announced a major move to enhance business practices of retail banks and financing firms offering products and services to retail customers.
Retail banks and financing firms offering consumer credit and other consumer products have adopted a code of conduct aimed at enhancing transparency and promoting a better understanding of consumer loans and other consumer products and services.
The Code of Best Practice on Consumer Credit and Charging, initiated by the CBB and developed in conjunction with the Bankers’ Society of Bahrain, sets out minimum standards for retail banks and financing firms, both conventional and Islamic, to follow in their dealings with consumers.
The provisions of the Code cover the full range of retail banking relationships between these financial institutions and their customers, from the sale of an appropriate product to ensuring dissemination of all relevant information.
The Code applies to all CBB licensees offering to individual customers like loans, overdrafts; any other type of financial product creating a creditor-debtor relationship (including Sharia compliant credit facilities of all types); and any other financial service for which the CBB licensee charges a fee.
The Code requires related CBB licensees to provide clear and written information and documentation about the products and services they offer as well as all the terms and conditions, including interest/profit rates and a breakdown of all applicable charges, including administration/arrangement fees, pre-payment charges and default interest rates.
The institutions concerned are also required to inform customers of any changes in terms and conditions applicable to any product/service.
The Code also requires retail banks and financing firms to establish a proper and formal mechanism, including a designated Customer Complaints Officer, to address and monitor consumer complaints. It sets out the proper procedures to be undertaken by CBB licensees in registering and addressing consumer complaints.
The Code’s provisions also call for a more sympathetic approach towards customers facing genuine financial difficulties.
The CBB has worked closely with the industry, through a joint committee, over the past five months to develop this Code, which obliges banks to enhance transparency and educate customers about their rights and responsibilities.
The Code should go a long way to improving transparency in the industry as well as bank-client relationships. It also clearly demonstrates the commitment of the CBB and the banks to enhancing banking standards in the country.
Banks in the GCC make a fortune selling products like credit cards and disbursing easy personal loans.
With competition becoming fierce, banks resort to all sorts of tactics to sell their products. What is lacking is adequate disclosure at the time of product sale, like the interest charged, the period for which the initial interest rates would be applicable and so on. Certain banks have abruptly raised their interest rates on loans and credit card payments without providing proper information to the customers.
Customers want to know the cost. In today’s world, the customer is no longer the servant of the bank as in the past, the roles have been reversed and the customer has become king. And because banks deal in only a single, fungible product called money, the pricing of those banking services has become of critical importance in retaining a more fickle customer base.
Similarly, for the banks, the relationship between retail pricing and profitability is no longer a subject of minor significance. In a more competitive marketplace, small pricing shifts can have a huge impact on the bottom line and banks may be missing out on big opportunities. Therefore a more focused approach needs to be taken.
The Bahrain Code is a major step by the banking industry to maintain high standards of ethics and best practices aimed at fostering consumer confidence which can be emulated by other GCC countries.

Talking Business
K S Sreekumar
sreekumar@tradearabia.net