Case Study -10

January 2008

Banking Mohtasib orders bank to pay Rs. 1.7 Million being profit on term deposit as committed in writing

In June 1999, a customer placed Rs. 4.5 Million for 5 years with the bank upon written undertaking by two officers that he would receive Rs 9 Million upon maturity.

However, upon maturity the bank paid only Rs 7.3 Million on the grounds that the deposit was placed on P & L sharing basis as printed on the deposit receipt and that banks could not guarantee fixed returns under Islamic Banking. A complaint was accordingly lodged with the Banking Mohtasib.

During investigations, the bank admitted the letter issued by its officers but defended the lower profit by saying that after the abolition of interest from the banking system in late 1985, any contract based upon a guaranteed rate of return on deposits placed with banks, is violative of the law and therefore void.

The bank’s contention was found to be flawed because the bank’s written undertaking constituted a binding contract. If afterwards the bank felt that the committed profit was excessive, it could only have extricated itself from the contact through notice to the customer and by paying a pro rata amount based on the committed rate so that the customer could have had the option to invest in some other profitable deposit scheme.

Banking Mohtasib felt that if the undertaking issued by authorized officers of the bank was against bank policy, it is the officers who should be held accountable by the bank; the customer cannot be made to suffer for their wrongdoing.

Banking Mohtasib felt that having attracted the deposits on a certain basis and having confirmed the basis in writing, the bank can not be allowed to walk away from a commitment held out to its customer and directed the bank to pay to the customer Rs. 1.7 Million being the difference between the amount already paid and the committed amount of Rs. 9 Million.

In addition, the bank was directed to compensate the customer for loss of profit on Rs. 1.7 Million short paid from maturity date of the deposit till the date payment of Rs. 1.7 Million under the Order.

The bank was also directed to pay the customer of Rs 25,000/- towards costs incurred by him in pursuing his rightful dues, inclusive of legal costs since June 2004.

Case Study -9

Banking Mohtasib holds bank responsible for late execution of customer’s instructions

On December 16, 1997 a borrower in financial difficulty, asked his bank to sell all his under lien shares and adjust his loan. At the time the market value of shares was Rs. 1,429,128/- and the loan plus unpaid mark up was Rs. 1,103,000/-.

By end December 1997 however, the bank had only partially delivered the shares to its broker and some of the shares were not sent to the broker until February 2001 by which time the stock market had slumped. Some of the shares were never sent to the broker by the bank.

As a result the loan was only partially adjusted. A total amount of Rs. 633,215/- was adjusted up to mid March 1998 and a further Rs. 175,000/- was adjusted through share sale proceeds by early 2002 reducing loan principal to Rs. 313,879/-. The bank continued to charge penal mark up and threaten legal action.

A complaint was lodged with Banking Mohtasib in December 2005 when total outstandings had increased to Rs. 905,581/- inclusive of unpaid mark up Rs. 591,702/-.

The bank denied any wrong doing saying that selling of shares was not its responsibility and had the borrower been serious about adjustment of his loan, he could have got the shares released from the bank and sold them himself in the market. The bank’s response was found to be evasive and naïve because any borrower compelled to dispose of his liquid assets, can not possibly be expected to be in possession of large sums of spare funds with which to repay his obligations.

After extensive investigations, the Banking Mohtasib found that the bank had demonstrated extreme indifference and inexplicable lethargy in the disposal of the shares held by it under lien.

The Banking Mohtasib felt that had prompt action been taken by the bank, there was every likelihood that all the under lien shares could well have been disposed of latest by March 1998, well before the market faced a slump, thus wiping out the entire loan including all mark up.

Holding the bank liable for the delay, the Banking Mohtasib decided that all the shares held with the bank were deemed to have been disposed of by March 31, 1998 at the then market value of Rs. 1,429,128/- and that the loan, inclusive of all mark up, was deemed to have been fully adjusted by March 31, 1998.

According to detailed calculations undertaken by the Banking Mohtasib, the amount the bank could have recovered at the time was Rs. 1,144,128/- thus the bank was directed to hand over the excess amount of Rs. 285,000/- to the customer and to issue him a clearance certificate.

In addition, the bank was ordered to pay to the customer Rs. 50,000/- as compensation for expenses incurred by him in pursuing, for nearly a decade, a matter which arose purely as a result of the bank’s failure to promptly act upon his instructions.

Case Study -8

Banking Mohtasib Resolves 11 year old dispute

In 1994 a person obtained a loan of Rs. 6,000/- from a major bank in Pakistan against pledge of 40 grams of gold ornaments. The loan was repayable in December 1995.

In September 1995 an armed robbery took place at the Branch and the gold ornaments were stolen. The Borrower completed documentary formalities for an insurance claim to be lodged by the Branch.

As the insurance claim had been made by the Branch, the Borrower claimed repayment of the value of the pledged gold less the amount of the loan. For more than eleven years the Bank did not satisfy the Borrower whereupon, in November 2006, he made a complaint to the Banking Mohtasib.

The Bank contended that upon an FIR lodged by it, the Police had arrested the dacoits and recovered from them 6 bags of gold ornaments out of the 25 bags that were stolen. The Sessions Court ordered the prosecutors to hand over the 6 recovered bags to the Bank, but the Bank refused to accept the bags in sealed condition, because it could not examine the contents prior to taking possession.

The case is therefore still pending in the Sessions Court. The Bank said that it would settle the claim only after the decision of the Sessions Court.

The Banking Mohtasib felt that the Bank’s stand was misconceived because the matter before the Sessions Court pertained only to the prosecution of the dacoits for crimes committed. The Sessions Court may sentence them to prison and in addition, may restore to the Bank the gold ornaments recovered from the accused upon completion of the trial. The Court proceedings had no concern with the Borrower except to summon him as a prosecution witness, if the Police so thinks fit to do so.

The Banking Mohtasib was of the view that upon completion of the trial in the Sessions Court, the case property i.e. the gold recovered from the dacoits, would be returned to the Bank formally or to the Insurance Company, if the Bank had received payment of its claim from it.

The Banking Mohtasib felt that the Borrower meanwhile had a present claim against the Bank and therefore ordered the Bank to forthwith pay to the Borrower the market value of 40 grams of gold and further ordered that the Bank was entitled to recover up to date mark-up on outstanding loan principal only.

The Borrower has since received net Rs. 36,947/-. The matter, which had been agitating the Borrower for the last 11 years, was thus satisfactorily resolved within 6 months of being reported to the Banking Mohtasib

Case Study -7

In April 2004, a customer of a large local bank deposited a cheque for Australian Dollars 2215/-(equivalent to Rs. 105,000/-) in his account. The cheque was drawn on a bank in Australia.

However, proceeds of the cheque were not credited to the account and when enquiries were made from the bank, the bank said that the cheque had been lost in transit and efforts to locate it were unsuccessful.

After complaint lodged with Banking Mohtasib in May 2006, the latest address of the issuer of the cheque was located and provided to the bank for further follow up but the bank’s efforts elicited no response from the issuer or the Australian bank.

With no result forthcoming locally, Banking Mohtasib sought assistance from Banking Ombudsman in Australia with the view of obtaining a duplicate cheque, when it transpired that the cheque had in fact been paid in June 2004.

Banking Mohtasib thereafter inspected the bank’s Australian Dollar nostro account and found that the proceeds of the cheque, which according to the bank had been lost, were actually received by the bank in June 2004 and were lying as outstanding. Despite many complaints, including enquiries from the Banking Mohtasib, the bank made no efforts whatsoever to trace the item in its records.

It was only when the Banking Mohtasib examined bank records that the amount was located.

An amount of Rs. 105,000/- was finally paid to the customer on January 23, 2007 after nearly 3 years. A further amount of Rs. 25,000/- was also paid as compensation for needless distress suffered by the customer purely due to bank’s negligence.

Case Study -6

During 2004, a foreign bank aggressively marketed for Term Deposits and told its customers that no penalties would be charged if premature encashment was desired. As a result of the campaign, many customers placed sizeable funds on 5 year Term Deposits with the bank. However, during 2005 when some of the depositors wanted to prematurely encash their deposits they were threatened with substantial penalties by the bank.

Bank’s stance

The bank defended the penalty by saying that it was empowered through its “Account Terms and Conditions” to alter any condition unilaterally at any time it chose. The bank claimed that even though the new penalty was included in its Schedule of Charges dated January 1, 2005, penalties were not invoked until July 1, 2005.

Banking Mohtasib’s findings and judgment

Banking Mohtasib accepted the rights of a bank to change its terms and conditions but noted that such change can only have prospective effect. For such change to have retrospective effect, implied consent of the customer was essential.

Banking Mohtasib felt that insertion of a new penalty clause in the Schedule of Charges was an unsatisfactory medium of publicizing a major contractual deviation because customers can not be reasonably expected to minutely study the detailed contents of the Schedule of Charges booklet to uncover unilateral change to an earlier contract.

Banking Mohtasib felt that proper course would have been through a letter to all term deposit customers offering customers reasonable time within which to exercise the option to early encash their term deposits under original terms and without attracting the new penalty.

Banking Mohtasib felt that by not offering an exit option, the bank has clearly violated the sanctity of the contract which was based on soft conditions offered to lure depositors.

Six such complaints have been decided by the Banking Mohtasib. The bank was ordered to waive the penalties as well as to pay the six customers profit @ 3% p.a. over and above the originally contracted rate from the time premature encashment was demanded by the customers until the time payment was made to the six customers under the orders of the Banking Mohtasib.

The bank has since waived penalties totaling Rs. 7,153,096/- and paid additional profit of Rs. 596,135/- to the customers.

Case Study -5

In 1983, Mr. Shah booked a locker at a Lahore branch of a major bank in Pakistan. In August 2005, a few lockers at the branch, including Mr. Shah’s locker, were broken in to by a guard of the security company engaged by the bank and the contents were stolen.

Mr. Shah claimed that the value of the contents of his locker was Rs. 2,182,072/- and asked the bank to make good the loss.

Bank’s stance

The bank refused to entertain the claim on the grounds that it had contracted out lockers security to a security company and it was up to the security company to make good the losses suffered by the locker holders. Mr. Shah thereafter lodged a complaint with the Banking Mohtasib in October 2005.

Banking Mohtasib’s findings and judgment

Until 2004, banks offering locker services did not assume any responsibility for losses suffered by locker holders; prime reason was that banks were unaware of locker contents.

However given the growing incidence of locker pilferage and refusal by banks to compensate affected locker holders, the State Bank of Pakistan (SBP), in 2004, directed all banks providing such services, to arrange insurance coverage, based on locker size, in the future. SBP also directed banks to ensure that all new and existing locker holders be advised the amounts up to which their lockers were insured.

The bank in question acted swiftly on SBP’s instructions and widely publicized its locker service through brochures and colorful leaflets announcing the security its lockers provided to customers and clearly indicated the insured value applicable to various sizes of lockers available with the bank.

Upon being questioned, the bank took the plea that lockers were guarded by an external security company and that the security company was responsible for the loss. The bank also pleaded that the insurance cover obtained by it in compliance with SBP directives, excluded any loss caused by the guards of the security company it had engaged. The bank was therefore not liable for Mr. Shah’s claim.

The Banking Mohtasib however felt that the loss suffered by Mr. Shah was the direct result of negligence of the bank for inadequate security arrangements of its lockers, which led to the posting of a guard whose antecedents were either fake or unknown.

The argument that the bank can not be asked to compensate the customer because both the security company and the insurance company have not paid the bank’s claim, was also not tenable. The Banking Mohtasib felt that a customer has no concern whatsoever with the arrangements made by banks for the security of their lockers; the customer only has a right to expect that such arrangements will be prudent and adequate. The subject bank chose to contract out its locker security to a third party and cannot be allowed to walk away from its responsibility, leaving the customer to pursue the security agency. Similarly, the contract of insurance was between the bank and the insurance company and only the bank (and not the customer) could have arranged for adequate cover and claimed under it. The customer was only made aware by the bank, through promotional material that all its lockers were covered against loss.

The Banking Mohtasib also noted that under SBP directives, any loss sustained by the locker holder shall be made good by banks immediately, and banks would pursue their claims with the insurers thereafter. The bank’s refusal to meet Mr. Shah’s claim was therefore in clear violation of SBP’s directives.

Mr. Shah had claimed that the value of articles stolen from the locker amounted to Rs. 2,182,072/-, but given the nature of the business of safe deposit lockers, it is not possible for any one to prove or disprove the figure. For this reason SBP had left it to the banks to determine the amount of indemnity each of them may choose to offer their customers based on locker size. The subject bank had chosen to offer Rs. 1 million for a small locker, Rs. 1.5 million for a medium sized locker, Rs. 2 million for a large sized locker and Rs. 3 million for an “Extra Large” size locker.

Mr. Shah’s locker was medium sized; hence he was entitled to a maximum of Rs. 1.5 million for his loss.

The Banking Mohtasib therefore ordered the bank to pay Rs. 1.5 million to Mr. Shah and in addition to pay him Rs. 50,000/- as compensation for the delay in the settlement of the claim and for undergoing the stress of prosecuting the claim.

Mr. Shah duly received the money.

Case Study -4

In October 2004, Main Branch of a bank in Lahore deducted Zakat Rs. 72,773/- from an account although the customer claimed to have handed in declaration Form CZ 50 for non-deduction. The customer protested but the Branch simply denied ever having received the declaration form. After several attempts to convince the Branch otherwise, the matter was reported to Banking Mohtasib on May 14, 2005.

Banking Mohtasib investigators visited the Branch and located the missing documents from archives in the presence of Branch staff.

The refund was made on June 14, 2005. Banking Mohtasib also sanctioned 3,750/- as compensation to the complainant.

Case Study -3

On November 28, 1989 under a Court Order, an amount of Rs. 50,000/- was placed on deposit with a bank payable with profit to four orphaned minor sisters when the youngest of the sisters attained maturity age on June 6, 1995.

In June 1995, the said bank was approached for payment but asked for another Court Order authorizing release. A Court Order was finally obtained in October 2005. The bank paid the principal plus a profit of Rs. 6,136/-. The profit was considered insufficient for a 16 years period but bank ignored protests made. A grievance was lodged with Banking Mohtasib on November 8, 2005.

After Banking Mohtasib intervention, profit was recalculated and a further amount of Rs. 22,194/- was paid to the sisters in December 2005.

Case Study -2

On June 4, 1992, a person then employed on deputation in Qatar, obtained a draft for USD 306/- drawn on the bank’s Peshawar Branch. The draft was sent to the Director Education, Peshawar representing contribution towards his pension fund, but the draft got misplaced.

After hectic enquiries both by the beneficiary and the Education Department Peshawar, the bank informed its Doha branch on December 26, 1997 that the draft was still outstanding in its books and requested issuance of a duplicate draft. The branch in Doha respond on March 24, 2001 confirming that as per its New York agency accounts records, the said draft had in fact been paid on June 12, 1992.

The Peshawar branch was repeatedly asked for details of payments but failed to respond positively. An oblique reference by the branch to old records having been destroyed was seen.

A formal complaint was lodged with Banking Mohtasib on June 18, 2005 and after Banking Mohtasib intervention, a duplicate draft for USD 306/- was delivered to the complainant in July 2005. The episode came to a satisfactory end after 13 years

Case Study -1

During 2004 an exporter discovered that an inward remittance of USD 4483/71 sent from Tokyo on April 22, 1992 was not credited to his account although a credit advice and a Proceeds Realization Certificate (both dated April 22, 1992) were issued by a foreign bank in Karachi.

When approached, the bank informed him that old records had been destroyed and in any event, the matter had become time-barred (the Bank had obtained a legal option to this effect).

A complaint was lodged with us on May 9, 2005.

The bank was contacted by banking Mohtasib after obtaining originals of the account statements, credit advice and the Proceeds Realization Certificate from the exporter. The bank was also shown case law to the effect that claims on an opperative account can not be time barred thus negating legal adivce it had earlier obtained.

Bank accepted our recommendations and credited the exporter's account after a lapse of 15 year's! However, no compensation was sanctioned by Banking Mohtasib because the exporter had failed in his duty to reconcile bank statements regularly.