BANKING INDUSTRY IN PAKISTAN

A bank is a place where they lend you and shadow in fair weather and ask for it back when it begins to rain.

Robert Frost

Banking sector is always a very important sector for every economy. Same is the case with Pakistan. Banks perform various duties which are dissimilar in nature. The primary and most important duty is to provide a safeguard for national assets. Other functions include profit making from the public funds (on interest rates) and lending of money to the borrowers. The whole of the economy and financial transactions are carried out through banking institutions these days. Banking system in Pakistan is one of the sectors, which have developed a lot in the past few years. Pakistan today has an very good banking network in all over the Pakistan comprising of a State Bank , which is a federal entity and has a central role in the banking sector of Pakistan. State bank has a very wide range of various private and national commercial and other banks that deal in specific areas such as consumer finance, agriculture and other financial institutions. State bank also regulate banking sector through its policies and physical inspection. However Banking System of Pakistan has adopted rough and tough policies.

Pakistan on the time of its creation i.e. in 1947 did not have an good banking system in it. Pakistani banking sector portrayed a marvelous performance in first two decades and got a good banking system. State Bank of Pakistan was constituted on 1st July 1948. The role of central bank is to regulate , observe and monitor and control the activities and all operations of all the commercial banks in Pakistan. State bank of Pakistan has many a set of regulations which are to be followed by all other banks in the country these regulations are called “Prudential Regulations.” Prudential Regulations are updated time to time to ensure the implementation of the current scenario..

Other important banking decisions such as discount rates and minimum reserves which must be maintained by every bank are also made by the state bank of Pakistan. State bank also hold the federal reserve of the county and also lends money to the government and other commercial banks in the country. One of the bad patch in the history of Pakistani banking industry was the zulifqar Ali Bhutto’s era. He decided to nationalize all the private banks. After nationalization of banks their efficiency was severely affected. They became the victims of political interference and pressures. This became a reason of the lowering nation’s currency of Pakistan and due to the devaluation in the currency balance of payments was severely hurt.

Now Pakistani banks are prospering and providing very good customer services to its customers like online banking and mobile banking etc. ATM cards and debit and credit cards have entirely changed the banking experience in the country. Now there are more private banks than government banks and they all are working well. Pakistan has the one of worlds’ strongest banking system which has a sound stand from the recent world crisis of banking system in America and other European countries.

The strongest bank in the United States will survive only so long as the people will have sufficient confidence in it to keep their money there.

story of Banking in Pakistan starts from the partition of Indo-Pakistan sub continent in August,1947. At that time, the areas consisting Pakistan had 631 offices of 45 scheduled banks out of which 487 were located in West Pakistan and 114 in East Pakistan which Was also served by 500 office of small and non-scheduled banks. There were 19 branches of foreign banks in Pakistan but they had a very limited role to play.

Just after the partition, the Indian bankers started immigrating and shifting the head offices of their banks and capital to India. It caused a great set back to the banking field in Pakistan, and resulted in decline in the number of offices in schedule bank from 631 to 195 by 30th June, 1948. The West Pakistan the number fell from 487 to 81 in East Pakistan from 144 to 69 by 30th June, 1951. Among these Habib Bank Ltd., with 25 offices and Australia Bank Ltd. with 19 offices were institutions run by muslims who shifted their head offices to Pakistan.

The technical and administrative difficulties of establishing a central bank just after independence compelled Pakistan to enter into an agreement with the Reserve Bank of India by which the bank was to perform the function of a central bank in this area also upto 30th September, 1948. The Reserve Bank of India started following wrong policies against the interest of Pakistan. The situation became so grave that after the consultation of two government the Reserve Bank of India was asked to finish the agreement from 30th June instead of from 30th September,1948. So the Government of Pakistan decided to establish the State Bank of Pakistan as its central bank from 1st July, 1948. In the same year first Pakistani notes in the denomination of Rs.5, 10, and 100 were issued and Indian currency was withdrawn from circulation. After it the government was advised to a bank which should serve as a agent of State Bank of Pakistan. On this suggestion National Bank of Pakistan which was established in 1949 to finance jute trade in East Pakistan to take over the agency functions from the Imperial Bank of India. Furthermore banking companies control act 1949 was promulgated which empowered the State Bank of Pakistan to control the operation of other banks. To boost the economic development the State Bank of Pakistan encourage the commercial banks and gave them schemes to advance in the agricultural and industrial fields. In addition to this specialize financial institutions were set up to meet the acute shortage of funds in these fields.

The State Bank of Pakistan's policy encouraged expansion in established banks, establishment of new banks, and weeding out of unsound banks just to faster the growth of banking system in the country. This policy not only established the banking system by 1965 but increased its functional efficiency, scope of operations and soundness to a great extent and the following banking structureemerged:

1. STATE BANK OF PAKISTAN (CENTRAL BANK)

2. COMMERCIAL BANKS.

3. SAVING BANKS

4. CO-OPERAT1VE BANKS

5. EXCHANGE LANES

6. SPECIALIZED FINANCIAL INSTITUTIONS

There are two types of the COMMERCIAL BANKS

1. Scheduled

2. Non-scheduled banks

According to the State Bank of Pakistan Act,1956 a bank having a paid up capital and a reserve of rupees five lacs and fulfilling certain other requirements can be scheduled with the State Bank of Pakistan. With the opening of the State Bank of Pakistan and the keen interest which it took in the establishment of the sound banking system in Pakistan despite the separation of the East Pakistan, commercial banking made a tremendous progress which can be judged from the following figures. Offices of the following 14 banks (scheduled) increased from 195 to 1948 to 3600 with 71 branches outside Pakistan in 1972, deposits from 88 Crores in 1948 to 1900 crores in 1972 and advances from 20 crores in 1948 to 1250 crores in 1972.

1. National Bank of Pakistan

2. Habib Bank Ltd.

3. Habib Bank (Overseas) Ltd.

4. United Bank Ltd.

5. Muslim Commercial Bank Ltd.

6. Commerce Bank Ltd.

7. Australasia Bank Ltd.

8. Standard Bank Ltd.

9. Bank of Bahawalpur Ltd.

10. Premier Bank Ltd.

11. Pak Bank Ltd.

12. Sarhad Bank Ltd.

13. Lahore Commercial Bank Ltd.

14. Punjab Provincial Co-operative Bank Ltd.

On January 1, 1974 the Government of Pakistan nationalize all the Pakistani scheduled banks including State Bank of Pakistan, industrial Bank of Pakistan, Agricultural Development Bank of Pakistan through the bunk- nationalization act, 1974 to achieve the desired objectives. The weaker commercial banks were merged with stronger ones and in all five major banking companies were formed.

1. NATIONAL BANK OF PAKISTAN

2. HABIB BANK LIMITED

3. UNITED BANK LIMITED

4. MUSLIM COMMERCIAL BANK LIMITED

5. ALLIED BANK OF PAKISTAN

The Federal Government also set up a Pakistan Banking Council on March 21, 1974 to look after the organizational and operational matters including evaluation and progress of the nationalized commercial banks. The State Bank was to provide the overall policy guidelines to commercial banks.

HISTORICAL RUNDOWN

With the triggering of the Occupy Wall Street and similar protests in the developed world, the chorus of voices protesting against the global financial system has become a cacophony. And in this moment of popular opposition, banks have come under fire for reckless lending, exorbitant payouts to CEOs and for availing massive taxpayer-funded bailouts.

But are banks in Pakistan also exhibiting symptoms of similar financial malaise caused by extensive liberalization, as are their counterparts in the West? Not quite. Pakistan’s experience with financial liberalization in the banking sector is vastly limited as compared to the developed world. A brief look at the history of banking in Pakistan reveals that the banking sector has made impressive achievements but still has a long way to go.

Humble beginnings, 1947 – 1970

Our financial sector evolved very differently from banks in the developed world. For nearly a year after partition, Pakistan had no central bank. Habib Bank – established in 1941 – filled this gap initially, until the State Bank of Pakistan (SBP) was set up in 1948 under quasi-government ownership. The role of domestic banks was particularly limited at the time, accounting for only 25 of the total 195 bank branches in the country. Therefore, the SBP was initially mandated to develop commercial banking channels, and maintain monetary stability so trade and commerce could flourish in the newly-created

state. Subsequently, Habib Bank, Allied Bank and National Bank were amongst the first to start operations with strong support from the central bank.

A legacy of public control, 1970 – 1980

Commercial banking grew favorably in Pakistan until 1974. Under the nationalization policy implemented by Zulfikar Ali Bhutto’s government, thirteen banks were brought under full government control, and consolidated into six nationalized banks. The Pakistan Banking Council was set up to monitor nationalized banks, marginalizing the SBP’s role as a regulator. These measures were meant to improve lending to prioritized industries. However, while directed lending was viewed favorably at the time, little can be said of the long-term gains that have been achieved.

Business as usual, 1980-1990

Over time, the financial sector grew to serve primarily large corporate business, politicians and the government. Board of Directors and CEOs were not independently appointed. Lending decisions were not always commercially motivated, and many billions of rupees were unsurprisingly funneled out of the financial system as “bad loans”. Banks were essentially not in control of their destinies during this period.

Privatization, 1990 – 1997

By 1991, the Bank Nationalization Act was amended, and 23 banks were established – of which ten were domestically licensed. Muslim Commercial Bank was privatized in 1991 and the majority ownership of Allied Bank was transferred to its management by 1993. By 1997, there were still four major state-owned banks, but they now faced competition from 21 domestic banks and 27 foreign banks. More importantly, administered interest rates were streamlined, bank-wise credit ceilings removed and a system of auctioning government securities was established, forcing the government to borrow at market determined rates.

Ushering in the reforms, 1997 – 2006

After privatization, transformational reforms were pushed through. The central bank’s regulatory powers were restored via amendments to the Banking Companies Ordinance (1962) and the State Bank of Pakistan Act (1956). Subsequently, corporate governance, internal controls and bank supervision was strengthened substantially. Legal impediments and delays in recovery of bad loans were streamlined in 2001. Furthermore, the scope of prudential framework set up in 1989 was enhanced, allowing banks to venture into hitherto untapped business segments. Lending to small and medium enterprise had previously been neglected, whereas consumer and mortgage finance had not developed prior to reforms.

The post-reform era, 2006 – present

Buoyed by the spirit of liberalization, the sector’s landscape has changed significantly. By 2010, there were five public commercial banks,25 domestic private banks, six foreign banks and four specialized

banks. There are now 9,348 bank branches spread throughout the country, catering to the needs of some 28 million deposit account-holders.

Banking in Pakistan – the long journey ahead

Much still remains to be accomplished. In the absence of sustainable economic growth, banks will remain vulnerable to business cycle fluctuations. As recently as 2008, non-performing loans increased sharply in response to the preceding years of easy credit and risky consumer lending practices.

Moreover, strong regulation will continue to be required so as to maintain the delicate balance between industry concentration and competition. Presently, the top five banks account for about 50% of the sector, measured in terms of total advances.

Finally, the benefits of financial liberalization must trickle down to the common man. Banks are proactively exploring new business models to make this happen – such as branchless banking. But more headway needs to be made before existing deployments – such as Tameer Bank’s Easypaisa or UBL Omni – reach a critical mass of users.

Reforms have helped banks come a long way, but unless the central bank remains autonomous, and continues to err on the side of caution, liberalization may quickly become a bitter pill to swallow.