nationalization of financial sector pakistan 1974

Rana Aqeel, Hassan Mohi-ud-Din, Umer Toor, Waqas Khalique,

Sehrish Asghar

Group 2: 1974 Nationalization & Financial Sector

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1st Jan 1974 – Nationalization of Financial Sectors

• Bank Nationalization Ordinance enforced in 1974, Bank Nationalization Ordinance enforced in 1974, 11stst Jan: Jan:– Exclusive rights of ownership, management & control Exclusive rights of ownership, management & control

of all banks to of all banks to Federal GovtFederal Govt..– Shareholders compensated for their holdings with Shareholders compensated for their holdings with

Federal bondsFederal bonds• Roots of nationalization in 1960s development in Roots of nationalization in 1960s development in

banking sector & economybanking sector & economy

Source: Zaidi, S. A., Source: Zaidi, S. A., Issues in Pakistan Economy, Issues in Pakistan Economy, OUP. 2004, p. 264OUP. 2004, p. 264


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Events Leading to Nationalization of BanksEvents Leading to Nationalization of Banks

• Meenai identified following issues in 1960s:Meenai identified following issues in 1960s:– Credit concentrated in bigger a/c of 22 familiesCredit concentrated in bigger a/c of 22 families– Interlocking of bank ownership & industries: Interlocking of bank ownership & industries:

exploitation of exploitation of depositsdeposits– Rural area & small businesses’ disparitiesRural area & small businesses’ disparities– Large Large marginsmargins (Margin = Rate of (Margin = Rate of lendinglending – Rate of – Rate of borrowingborrowing))

– Illegal gratification to institutional personnelIllegal gratification to institutional personnel

Source: Meenai, S. A., Source: Meenai, S. A., Money & Banking in Pakistan, Money & Banking in Pakistan, OUP. 1984, OUP. 1984, p. 230p. 230


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Events leading to Nationalization (II): A Change in the Air

• Recommendations of 1962 Credit Commission:– Sustain small & middle-class borrowers– Commercial banks set up small loan dept.– Unorthodox security policy for small owners– Lower margins for small loans

• Policies were not implemented in 1960s• To chase industrialists out of planet – Bhutto saw

capitalists’ as the source of evil• Political commitment: PPP promised

nationalization in its manifesto

Source: Zaidi, A. S. Issues in Pakistan Economy, p. 264; Meenai, S. A., Money & Banking in Pakistan, OUP. 1984, p. 231


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Exploitation of Industrialists

• Owned lot of banks• Most accounts belonged to them• Looted resources• Maintained hegemony: barred access to credit• Defaulters• 6/14 banks bankrupt


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Objectives of Nationalization of Banks

• “Directing banking activity toward national socio-economic development

• Achieving more equitable distribution of bank resources

• Ensuring complete safety of depositors’ funds• Improving overall efficiency of banking system”• Also, to increase savingsSource: Govt. of Pakistan, Pakistan Economic Survey, 1974-75, p. 179


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1972 Reforms: First Love• 1972 Banking Reforms – prelude to

Nationalization:– SBP authorized to remove BoDs, directors– NCCC determined annual needs of economy– Encouraged banks to serve small businesses – Rooted out unethical practices

• Agriculture Advisory Committee set up

Source: Meenai, S. A., Money & Banking in Pakistan, OUP. 1977, p. 20-21


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Structural Changes• A concentrated nation-wide banking system similar to 4

banks in UK• Unlike UK, Pakistani banks were:

– State-owned– “End-result of consolidation & restructuring through an

administrative process”• 5 Banks emerged after a merger of 14 banks:

– Habib Bank, National Bank, United Bank, MCB & Allied Bank

– 6/14 banks were bankrupt at that time, incl. UBLSource: Khan, B. “Note on Banking Industry in Pakistan (A): 1948-90.”, p. 5


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Introduction of Credit Ceilings

Putting limits on credit to a sector:A. Purpose: direct credit to agriculture sector

– Problem: Political exploitation of credit serviceSource: Rehman, S-ur., Who Owns Pakistan? p. 19; Interview of a 1970s banker

B. Credit allocated to banks – As per a bank’s past performance in deposit

mobilization– Undue advantage to past performance than success in

securing new depositsSource: Khan, B. “Note on Banking Industry in Pakistan (A): 1948-90.”, p. 5


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Pakistan Banking Council (PBC)

Operation | control | administration | interference

Source: Meenai, Money & banking in Pakistan, OUP, 1984; Khan, B. A. ‘Note…’, p.6


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Years of Massive Expansion & Growth (I)• Branches:

– 1971: 2,000+ vs. 1978: 7,000+• Employment: A goal: 40% increase in a year

– 1974: 45,165 vs. 1976: 61,865• Assets & Liabilities: 415% increase

– 1970: Rs. 3,827.2 m– 1978: Rs. 19,735 m

• Loans & advances:– 1972: Rs. 11.2 m– 1978: Rs. 36.6 m

Source: Govt. of Pakistan, Pakistan Economic Survey, 1975-76, p. 153 & 156


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Years of Massive Expansion & Growth (II): Reasons

• Increase in branches:– PBC’s policy: a bank branch for 5000 or more

peopleSource: Pakistan Economic Survey, 1975-76, p.183

• Loans: – Government securities as collateral

Source: ‘Note on Bank Industries,’ p. 6

• Deposits– Expansion in banking operations– Inculcation of saving habits


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Sector-wise Growth in Advances: Change of Heart


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Agricultural Financing


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• Increase in credit given to agricultural units for seeds, tractors, etc.

• Increased growth of agricultural output

Source: Zaidi, A.S. Issues in Pakistan Economy, p. 106

Financial Analysis: Profitability Question

• ROA: decreasing trend due to well in excess reserve ratio which hampered profitability

• NPLs; defaults also decreased profitability• However, volume of deposits increased from Rs.

30,000 m to Rs. 80,000 m from 1974 to 1979Source: Govt. of Pakistan, Pakistan Economic Survey, 1975-76.


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An Irony: Savings Boom, Profits Doom?• Phenomenal growth in

savings• Excess capital reserve

ratio (CRR) adverse effect on profitability:– Reduce yield– Put pressure on

alternative assets to generate profits (like, govt. securities)

• Positive: safety of deposits (capital adequacy)

Source: Khan, B. “Note on Banking Industry in Pakistan (A): 1948-90.”, p. 6


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Impact on Monetary Assets• Increase in monetary

assets created inflationary pressures on economy

• -10.5% real interest rate hampered resource mobilization (deposits)Source: Khan, B. “Financial Markets of Pakistan,” p. 222, in 50 Years of Pakistan Economy, edited by S. K. Khan


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Role of Development Finance Institutions (I): Chaos

• DFIs got low cost (below market rate) long-term liabilities from World Bank & ADB

• Supposed to lend it long-term projects: to IDBP (Industrial Development Bank), PICIC, ADB, etc.

• In practice: people borrowed for working capital at low cost

• Flattened yield curve

Source: Interview with Finance Professor Dr Bashir A Khan, F. C. College


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Role of Development Finance Institutions (II): Chaos


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Evaluating Nationalization: Brighter Side


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Evaluating Nationalization (I): Darker Aspects• Destroyed profitable banks (ROA)Destroyed profitable banks (ROA)• Profitability of NCBs reduced due to high reserve ratio & Profitability of NCBs reduced due to high reserve ratio &

lack of professionalismlack of professionalism• Banks = employment exchangesBanks = employment exchanges• More people (over)employed on More people (over)employed on political basispolitical basis• Excessive branches, infeasibleExcessive branches, infeasible• Non-performing loans (NPLs) Non-performing loans (NPLs) • Bureaucratic managementBureaucratic management

All of this led to de-nationalizationAll of this led to de-nationalization

Source: Amir Hussain Shar, et. al., “Performance Evaluation of Pre-post Nationalization Source: Amir Hussain Shar, et. al., “Performance Evaluation of Pre-post Nationalization of Banking Sector in Pakistan: An Application of CLSA-Stress Test,” International of Banking Sector in Pakistan: An Application of CLSA-Stress Test,” International Journal of Business and Management Vol. 5, No. 11; NovemberJournal of Business and Management Vol. 5, No. 11; November


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Evaluating Nationalization (II): Darker Aspects

• ““You can bring the rich to the level of poor overnight You can bring the rich to the level of poor overnight but it takes a lifetime to lift the poor to the level of the but it takes a lifetime to lift the poor to the level of the rich”rich”

• ““If the rich are getting richer, this does not necessarily If the rich are getting richer, this does not necessarily mean that the poor are getting poorer.” mean that the poor are getting poorer.” – Two Irish proverbs in a BBC programme on Feb. 17, 1995 : Two Irish proverbs in a BBC programme on Feb. 17, 1995 :

• Middle class businesses not transformed into bigger, Middle class businesses not transformed into bigger, competitive units; destroyed big tycoonscompetitive units; destroyed big tycoons

• Private bank owners took their capital out of economy Private bank owners took their capital out of economy and established businesses abroadand established businesses abroad

• Failure of DFIsFailure of DFIs


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Afterthoughts

• You don’t have to kill industrialists for equity• Interlocking of credit & industries natural

(with/without nationalization); Japan: Main Lending Banks

• Nationalize, theoretically:– bankrupt banks with seismic risk factor– run by technocrats

• Alternate ways to end injustices in system• Clash of Agendas: inherent problem


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References• Books

– Govt. of Pakistan, Pakistan Economic Survey, various issues– Khan, S. K. (ed.) 50 Years of Pakistan Economy– Meenai, S. A., Money & banking in Pakistan, OUP, 1984 & 1977 edition– Qureshi, ML, Planning & Development in Pakistan, Vanguard Books, Lahore – Rehman, Shahid-ur, Who Owns Pakistan? Online edition– State Bank of Pakistan, Banking Statistics, various issues– Zaidi, A. S. Issues in Pakistan Economy, 2004. OUP

• Journals/Notes– Amir Hussain Shar, et. al., “Performance Evaluation of Pre-post Nationalization

of Banking Sector in Pakistan: An Application of CLSA-Stress Test,” International Journal of Business and Management Vol. 5, No. 11; November

– Khan, Bashir A., “Note on Banking Industry in Pakistan (A): 1947-1990,” F. C. College, University. Lahore


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