Muhammad Kamran Shehzad: Commercial mediation in emerging
markets - role of State Bank in promoting mediation for resolution of
banking disputes
Speech by Mr Muhammad Kamran Shehzad, Deputy Governor of the State Bank of
Pakistan, at the National Conference on Alternative Dispute Resolution (ADR), Lahore,
29-30 April 2010.
* * *
I feel privileged to be here today and share some thoughts on ADR mechanism for the
resolution of banking disputes in Pakistan. Let me admit at the outset that Pakistani banking
sector is not yet fully geared to avail maximum benefit from mechanism like mediation for
settlement of disputes. The main reason seems to be the lack of awareness and perceptions
of losing legitimate legal rights especially in the matters of recovery of loans. However, due
to world-wide popularity of ADR, these perceptions are changing and both banks and their
customers are becoming aware of alternatives available for settling disputes without
compromising their interests. Keeping in view the potential of ADR as a viable dispute
resolution mechanism, there is always a natural preference for it over litigation. However,
there is need to disseminate the pros and cons of ADR in a correct perspective so that
parties realize the significance of ADR. I believe that collective efforts of all stakeholders and
an integrated approach can familiarize ADR in banking circles and SBP as a regulator on its
part is willing to support this initiative.
In the general sense, ADR means out of court settlement of disputes by way of mediation,
conciliation, arbitration or expert determination. Arbitration is more relevant in the
international context since overseas investors and parties generally require Arbitration clause
in agreements. The mediation on the other hand is more relevant, cost effective and speedy
way of resolving commercial disputes under which parties agree to ask a third person to help
them find a solution to their dispute.
Due to phenomenal growth and expansion of international transactions worth trillion of US
dollars across borders and territories, disputes also increased manifold between citizens and
governments and citizens of one country with citizens of another country. The cases filed by
the parties in courts for resolution of disputes and enforcement of contracts overburdened
the legal machinery. The developed countries therefore, introduced the concept of settling
disputes outside the court under the name of Alternate Dispute Resolution in 1970s.
The emerging economies and more specifically countries like Singapore, Malaysia, Hong
Kong and Indonesia already have developed a certain kind of ADR system as per their local
environment and legal systems. Indonesia has particularly established a solid system of ADR
for banking system. The central bank - Bank Indonesia has issued detailed circular for banks
to avail ADR for settling disputes and hence banking mediation has been institutionalized.
Malaysia has also established Financial Mediation Bureau as an independent body to help
resolve disputes between financial institutions and their customers. Monetary Authority of
Singapore has been promoting the ADR mechanism through educational supportive
programs. The central bank of Morocco created a system of resolving bank and borrowers
disputes.
It may be noted that the concept of settling disputes outside court is historically well known to
Pakistani society in the form of Punchayat and Jirga etc. The experience of long
consumption of time through formal judicial system is very common phenomenon.
The courts are over-burdened due to huge backlog of cases. It is in this perspective that Law
and Justice Commission of Pakistan recommended ADR to provide relief to the parties
engaged in litigation. Accordingly, the Government in 2002 had made amendments in Civil
Procedure Code under which Section 89 B was inserted to empower civil court to adopt ADR
subject to consent of the parties. A consequential amendment was also made in Order X of
C.P.C to empower the court to pass necessary orders for expediting the trial proceedings.
Unfortunately, these provisions have somehow not been fully utilized due to which objective
and benefit of these amendments is currently not visible.
It would be important to keep in view the fundamentals of banking sector in Pakistan while
examining the relevance and significance of ADR in the prevailing circumstances. Besides
walk-in customers, over 25 million people currently have regular accounts with banks in
Pakistan. The deposits of the banking system stand at about rupees 4.8 trillion whereas
loans and advances extended by banks as of December, 2009 were rupees 3.2 trillion. The
amount of nonperforming loans at present is rupees 432 billion. The banks have filed 56320
recovery and execution cases in courts involving rupees 215 billion.
The cases filed by borrowers and customers other than recovery suits are in addition to the
aforesaid cases.
The foregoing facts amply clarifies that there is overreliance on courts for all disputes which
the parties cannot resolve themselves. Due to high stakes, parties are sensitive to protect
their rights. Therefore, there is a dire need of putting in place a mechanism of dispute
resolution which is speedy, cost effective and just to maintain confidence and continuity of
banking transactions.
Let us look at some elements of existing mechanisms of dispute resolution where SBP is
wholly or partially involved. The events like privatization of financial institutions, liberalization
in the economy, stiff competition among the market players, advancements in information
technology and telecommunication have brought about newer aspects of complexities along
with growth of the banking sector. The increasing complexity in the products being offered by
banks and substantial growth in consumer credit has caused a significant increase in the
number of complaints with diverse nature of disputes. Although SBP continued to redress
public grievances against banks, the increasing number of complaints require a reliable and
independent source of complaint redressal. Therefore, institution of Banking Mohtasib
Pakistan was established in 2005 under Part VI A of Banking Companies Ordinance, 1962. It
may be clarified that jurisdiction of Banking Mohtasib is well defined and not restricted to
maladministration of public sector banks only. The Banking Mohtasib is competent to
entertain complaints from customers, borrowers, banks or from any concerned person. In the
first instance, the Banking Mohtasib has been mandated, under the law, to try and facilitate
an amicable resolution or settlement by resorting to mediation, failing which he can pass an
order that if not appealed against within a defined timeframe becomes final and operative.
As per Report of Banking Mohtasib, it has disposed off 2879 complaints in 2009.
While it is a very modest beginning, State Bank is assisting Banking Mohtasib to increase its
capacity and outreach to facilitate the aggrieved customers of the bank.
SBP' Consumer Protection Department: Besides direct complaints received from general
public, State Bank is appellate authority against decisions of Banking Mohtasib under the
same Part VI A of Banking Companies Ordinance. Till 2008, SBP was handling public
complaints through Banking Policy and Regulations Department. However, in the wake of
increasing number of complaints as also due to its enhanced responsibility as appellate
authority against decisions of Banking Mohtasib, SBP created a specialized department
namely, Consumer Protection Department to resolve banking disputes in a more focused
and professional manner. The department was able to dispose of 8000 complaints during the
year 2008 whereas during 2009 a total number of 13000 complaints were handled. The very
objective is to provide a faster, cheaper and efficient way of redressing public grievances and
resolving disputes. SBP feels that it has contributed toward reduction of court cases which in
the absence of the mechanism were sure to go in courts.
In addition, various courts have been sending cases to SBP where matters involved technical
scrutiny and analysis of facts. As per court orders, SBP successfully resolved a number of
disputes involving banks and customers. It is pertinent to mention that SBP had issued
directive under Circular No. 17 of 2004 in terms of which banks are required to put in place a
complaint handling system. The objective is to promptly resolve the issues received directly
by banks or referred by other quarters including SBP. However, the mechanism cannot be
relied since bank being a party to the dispute would have natural inclination to prejudice the
other party.
In a related development, High Court while disposing of several Writ Petitions relating to
recovery of finance had emphasized the importance of ADR. The Hon'ble Court observed
that litigation is not only time consuming but also has adverse implications for business
environment. The Court further desired SBP to issue instructions to banks that before
approaching courts, attempt should be made to resolve disputes through mediation/
reconciliation.
Subsequent to Court Orders, Karachi Centre for Dispute Resolution (KCDR) met SBP and
desired issuance of instructions to banks for availing remedies available through the Centre
and support holding of seminar for banks. Accordingly, SBP circulated aforementioned Court
Order to banks on March 09, 2009 with the view to let the banks know about availability of
ADR mechanism and give an indication that both the Courts and SBP support the use of
ADR. A seminar was also held for banks through Pakistan Banks Association in SBP in May,
2009.
The foregoing facts fully explain that SBP supports the idea of resolving disputes outside the
court. The expeditious settlement of issues would be in the interest of banking system in
particular and economy in general. The bank management would be able to devote their time
to business and other prioritized areas instead of being bogged down in lengthy time
consuming disputes with their customers. Likewise customers would also be able to settle
their cases and move forward with their businesses. It is, therefore, a win-win proposition for
all stakeholders.
Unfortunately as per feedback received from KCDR (Karachi Centre for Dispute Resolution),
the number of cases referred by banks to it is extremely low on one hand and even the
referred cases were haplessly non-productive due to non-traceability of parties or issues
involving willful defaults. The customers of banks also prefer to lodge complaint against
banks either with Banking Mohtasib or directly with SBP. The exact reasons of low number of
fit cases not being referred to KCDR cannot be explained; prima facie it could be partially
due to the following factors.

First as I mentioned earlier is the lack of awareness about the available mechanism
or institutions like KCDR for alternate dispute resolution. This can be taken care of
with some workshops and seminars or conferences on ADR.

Second, high profile cases involving big amounts are directly filed in courts to secure
banks' interest in a more formalized way especially to avoid charges of negligence
or collusion.

Thirdly, the failure of mediation results again in continuation of legal proceedings.
Since there has been a tendency in defaulters to stretch legal proceedings as much
as they can, the banks may have an apprehension that ADR would also be used by
such unscrupulous elements to further delay the course of justice.

Where amounts are small, parties prefer to send a single page application to SBP
without incurring any cost. SBP enjoys high degree of public trust and complainant
believes that SBP takes action on merit. The customers of banks not only get final
decision of the case but interim interaction is also maintained for further information
or sometimes meeting in SBP. In this way, customers get relief without incurring any
cost or going through any hassle.

SBP has presence all over Pakistan. Although complaints are handled in Karachi,
the field offices of SBP properly guide general public to process their applications.

Neither Banking Mohtasib nor SBP charge anything for complaint redressals.
The fee charged by KCDR may in some cases be the reason especially in small disputes.
Going forward, there are certain expectations from SBP to promote ADR.
Setting up an independent mediation centre: SBP feels that currently institution of
Banking Mohtasib and Consumer Protection Department are functioning satisfactorily.
Further, SBP considers KCDR as a reliable center. The parallel system of mediation would
not be appropriate due to defined role and responsibilities of SBP under the banking
legislation. However, SBP would welcome cases referred by Courts or any other quarter
involving banking disputes.
Awareness events from SBP Platform: SBP supports this and intends to hold meeting of
Senior Executives of banks in SBP. KCDR would be invited to explain in detail the facilities
and benefits of mediation. Besides, it would be clarified to banks that SBP not only has any
reservations over utilization of mediation but supports it due to its advantages over litigation.
Inclusion of mediation in curriculum of banking courses/training
Programs: This is also agreeable. New entrants and existing staff are provided necessary
training through NIBAF and inclusion of suitable material on the subject would be helpful in
creating awareness and understanding of the mechanism. We would obviously welcome
suggestions of KCDR in finalizing curriculum and imparting training.
Issuance of policy directives to banks: It would not be appropriate to prescribe a particular
way of seeking remedies especially keeping in view the regulatory role of SBP. The
directives issued by SBP are binding on banks and as a matter of policy we can facilitate,
encourage but not force banks to avail facilities of KCDR. This is the decision which parties
have to make themselves. Otherwise, directives issued by SBP run counter to the spirit of
ADR/ mediation which is necessarily a mechanism based on mutual consent of the parties.
Mediation under "terms and conditions" of various products: We are of the view that
Pakistan Banks Association is in a better position to evaluate whether banks should include it
as a condition of the agreement or not. SBP is neutral in that it is for banks to decide which
option they want to avail in case of disputes.
Taking advantage of this forum, my message today is same as observed by Hon'ble Court
that prior to filing cases in courts, the option of mediation/reconciliation should be explored to
avoid unnecessary costs, time and inconvenience. This would not only benefit the parties but
facilitate release of valuable resources for the businesses which are critically dependent
upon timely availability of funds. Further, the court system would be receiving lesser number
of cases and hence its efficiency will increase. In my view, mediation has at least the
following positive points as compared to formal court litigation:
i) ADR enables settlement between the parties with their consent and cooperation.
Therefore, unlike court case, none is loser but a win-win situation for the parties.
ii) The costs of ADR relative to court expenses are substantially low. Further, the cost
of ADR is shared by the parties whereas under court decision loser has to pay costs
if allowed by the Court.
iii) ADR provides solutions quickly, cost effectively and privately as against lengthy
procedures of court proceedings, high expenses and no privacy.
iv) ADR not only economizes on case expenses but saves valuable time of human
resource and management as well as stress related to Court cases.
v) The parties set venue and timing for ADR proceedings whereas Court rules are to
be strictly followed for court proceedings.
vi) The parties use delaying tactics due to which court cases linger on for years. The
next date of hearing comes after months. The parties under ADR cooperate and the
matter can be resolved even before a week.
Finally, I thank IFC and KCDR for organizing the event which I believe will achieve its
objective of disseminating ADR knowledge and creating awareness. SBP will continue to
play its due role for early resolution of banking disputes.