The Banking Sector of Pakistan

Introduction :-

The banking sector plays an important role in the economic development of the country . The growth in the banking sector was observed after 1990 when liberalization was done through banking sector reforms .Bank is a financial institution which lends money and safeguards the deposits of the bank account holders. These deposits can be withdrawn by cheques. Banks are considered as financial intermediaries. The function of a financial intermediary is to sell the products designed by them to make money. The banks acquire interest by selling their obligations. The Pakistani banking sector has gone through different phases of growth. The sector was directed by the government of Pakistan to implement the development strategies till 1980’s. To stabilize the financial and banking sector of Pakistan, the government nationalized the institutions so the declining economic growth can be revived. Later in 1990, the government of Pakistan liberalized and deregulated the banking sector. To maintain the market based banking, the government privatized the government banks and also made relaxations to help the private sector to open up new private banks. The target was to improve the management system and increase the earning of banks by strengthening the quality of assets provided by the banks. Other then this, relaxations were provided in credit control, deregulations were observed in interest rates and capital market developments helped in creation of competitive environment in the banking industry of Pakistan .

 The banking sector of Pakistan has gone through three phases which are pre-nationalization, nationalization and post nationalization. In pre-nationalization phase, Australian Bank Ltd. and Habib Bank Ltd. were the only two banks after the partition of Pakistan and India on August 14, 1947. For both the newly established countries, the Reserve Bank of India was performing as the central bank. A need was felt to establish the banking sector of Pakistan because the Reserve Bank of India was not performing its functions fairly for Pakistani banking industry. The Pakistani government founded State Bank of Pakistan in1948 and National Bank of Pakistan in 1949. The Government then launched State Bank of Pakistan act in 1956 and introduced Banking Companies Ordinance in 1962 for the development of banking sector of Pakistan. The second phase began in 1974. The government decided to nationalize the banking sector by merging all the banks and established five banks. The last phase which is titled post nationalization began in 1990 when the government of Pakistan privatized the banks and denationalized two financial institutions by making amendments in National Act of 1974. The government made relaxation in the policy of opening up of private banks which encouraged the private sector to grow.

The Pakistani banking industry encompasses nationalized commercial banks, private banks, public sector banks, foreign banks, Islamic banks, specialized banks and microfinance banks. There are some companies in Pakistan which are working as banks so the financial sector can develop along with economic growth. In 1993, 33 commercial banks were functioning out of which 19 were foreign and 14 were local banks. By the end of 2001, the number of commercial banks increased to 43, out of which 19 were foreign banks and 24 were local banks ( Akhtaret al.,2010). In 2010, the number of bank branches reached 9,348 which comprised of 25 domestic private banks, five public commercial banks, four specialized banks and six foreign banks. At present, the State Bank of Pakistan is regulating 46 banks which comprise of 39 local banks and seven foreign banks. The local banks comprise of four specialized banks, five public sector banks, five Islamic banks, eight microfinance banks and 17 private banks (State Bank of Pakistan, 2012). This indicates that the banking sector of Pakistan is growing rapidly.



Literature Review :-

Before the partition of Pakistan and India in 1947, the banking in Pakistan was dominated by the British banks. Only two banks were located in Pakistan’s territory at the time of independence with total deposited amount of 880.0 million. Some banks of Pakistan faced liquidation and the payments were not made to the depositors. Steps were taken to handle such issues and to establish the banking industry of Pakistan. In 1948, State Bank of Pakistan was established. The operating domestic bank branches were only 25 out of 195. The State Bank of Pakistan focused on promoting the banking industry so trade and commerce can be promoted in the country. The State Bank of Pakistan supported Habib Bank Limited, National Bank of Pakistan and Allied Bank Limited to achieve this objective. The National Bank of Pakistan was established in 1949. Agriculture Development Bank and Industrial Development Bank of Pakistan were the most outstanding establishments during the period of 60’s and 70’s. In 1961, both these financial institutions were established. The number of banks grew in Pakistan and reached to 14 with 3323 offices were established in Pakistan and 74 offices were in foreign countries.

·         Phases of Banking In Pakistan :-

a)  Nationalization of Banks :-

The banking industry of Pakistan progressed rapidly after 1974. In 1974, the nationalization policy was announced by the government which was aimed at promoting welfare by distributing credit to all classes of the society and develops the economy of Pakistan by using the capital which was in the hands of few bankers. This policy was designed because of the Bank Nationalization Act. According to this act, six banks were established by merging thirteen commercial banks (e.gHabib Bank Limited, Standard Bank Limited, Commerce Bank Limited, Muslim Commercial Bank Limited, United Bank Limited, Allied Bank Limited, Australia Bank Limited, Bank of Bahawalpur Limited, Premium Bank Limited, Pak Bank Limited, Sarhad Bank Limited, Punjab Provincial Cooperative Bank Limited and Lahore Commercial Limited). The six banks were National Bank of Pakistan, United Bank Limited, Habib Bank Limited, Muslim Commercial Bank Limited and Allied Bank Limited. The Pakistan Banking Council was established in 1974 which coordinated the functions of nationalized commercial banks. The nationalization of banks is divided into three phases. Bank Bhahawalpur was merged with National Bank of Pakistan in the first phase. Premier Bank Limited was consolidated with Muslim Commercial Bank. Sarhad Bank Limited and Pak Bank Limited were combined with Allied Bank. In second phase, Commerce Bank Limited was combined with United Bank Limited. In third phase, Standard Bank Limited was fused with Habib Bank Limited.

b)  Post – Nationalized Period :-

The banking sector of Pakistan continued to grow but it was mainly benefitting the politicians and the government. Political influence affected the period of 1980 to 1990 in which the hiring of board of directors and chief operating officers was not done on merit. Corruption was at its peak in this era, as loans were taken which were not contributing towards the growth of the banking industry. In 1981, Islamic banking was introduced which focused on interest free banking. Interest free loans were introduced and were given to farmers, students and fishermen. Financial schemes were introduced which Hire and Purchase were Financing, Musharika Financing and Modaraba Financing.

c)   Privatization of Banks :-

Nationalization Act 1991 was modified to benefit the banking sector of Pakistan. A total of 23 banks were founded. Domestic licenses were issued to 10 banks. Muslim Commercial bank was denationalized. In 1993, the ownership of Allied bank was transferred to its employees. In 1997, four banks were still operating under the control of the government. These banks were facing challenges from 27 foreign banks and 21 domestic banks. The privatization played a positive role by managing the interest rates and abolished the credit ceilings. Due to these changes the government loan rates were set according to market rates and the government securities were auctioned

d)  Post Privatization :-

After privatization, the regularity powers were restored because of modifications in Banking Companies Ordinance 1962 and Bank of Pakistan Act 1956. This resulted in improved internal controls, banks supervision and corporate governance. Small and Medium Enterprise (SME) finance, consumer and mortgage finance was encouraged. Due to liberalized policies of banking, the financial sector improved.

·         Current State of Banking Sector of Pakistan :-

Pakistan’s banking industry has proved to be playing a supportive role in growth and development of the economy of Pakistan. According to the State Bank of Pakistan Act, the system of banking is running under a two-tier pattern concept in which it includes commercial banks, specialized banks, state owned banks, microfinance banks, development finance institutions and Islamic banks. By end June 2010, the number of commercial banks in Pakistan’s banking industry increased to 36. Out of which 25 were private banks, seven were foreign banks and four were public banks. Besides these banks, four specialized banks were also operating with 9,087 branches in different cities. In addition, six Islamic banks were also operating.

In the same year, Industrial & Commercial Bank and Sindh Bank were issued licenses. Opportunities were created by the former bank in the field of trade and finance with the help of Chinese companies which were working in Pakistan. The latter bank created opportunities in the field of agriculture. According to the statistics of State Bank of Pakistan (2013), the banking industry is comprised of multicultural nature of banks and financial institutions. There are 39 commercial banks, 11 microfinance banks, 7 Islamic banks, 5 nationalized scheduled banks, 4 specialized banks, one central bank and 1 housing finance company.

·         Rational Behind Growth in the Banking Sector of Pakistan :-

Economic Development & Performance of the Banking Sector of Pakistan :-

To make the banking sector more resilient and competitive, some structural changes were made by the State Bank of Pakistan. As the banking sector of Pakistan played an important role in the growth and economic development of Pakistan, certain questions were raised which asked for the justification of the reforms in the banking sector.

i. Why banking sector of Pakistan need healthy performing banks.

ii. How the State Bank of Pakistan help in improving the performance of banks.

iii. How the State Bank of Pakistan policies are supported by the government.

iv. How the reforms in the banking sector help the depositors, businessmen and the common man.

The growth in the banking sector is directly linked with the economic growth and development of the country. So, reforms introduced in 1990 played an important role in generating revenue for the banking sector. The reforms were needed because banking sector is the only sector which survives the economic shocks.



·         Growth in the Banking Sector of Pakistan & The Impact on Revenue Generation 2007 to 2012 :-

The banking sector of Pakistan relies mostly on the government policies of Pakistan. After the 2002 elections, the newly established government formulated policies which supported the growth of the banking sector. This sector in the past was in the hands of the public sector but after the new policies, competition was seen. The banking sector turned profitable after 2002. The banking sector generated revenue of $1.1 billion in 2006. The world saw the Global Financial Crisis which was difficult on all sectors of the economy. Despite all the difficulties, the banking sector of Pakistan showed stiffness and it was able to handle the pressures of the Global Financial Crisis. During the crisis, the large banks maintained a very healthy position and the smaller banks started to offer their services to niche markets so they could survive the crisis.

Per %







March 2011

June 2011

Sept  2011



March 2012

Growth Rates




















Loans (Net)




















Investments (Net)





















Assets :- The financial soundness indicators provided by the State Bank of Pakistan show how the banking sector survived through the Global Financial Crisis from 2007 to 2012. The assets of the banking sector which were 18.8 percent in 2007 reduced to 8.8 percent in 2008. But as the banking sector slowly recovered from the crisis, the assets started to grow and then again they regained their position in March 2012 which was 16.6 percent.

Loans (Net) :- The loans (net) which were 10.7 percent in 2007 showed growth to 18.3 percent in 2008. This growth is because the government borrowed money from the banking sector to fund its economic budget. After 2009, the banking sector has not performed well in lending loans because of high interest rates till March 2012.

Deposits :- The deposits which were 18.4 percent in 2007 reduced to only 9.4 percent in 2008 but with the passage of time, the deposits of the banking sector grew and reached 16.5 percent in March 2012.

Investments (Net) :- The investments (net) were 53.1 percent in 2007 which got negative in 2008 because of the Global Financial Crisis as every investor wanted to save their investment. After the Global Financial Crisis, the investments (net) grew to 39.5 percent in March 2012.

Equity :- The banking sector equity was 35.5 percent in 2007 which was reduced to only 3.4 percent in 2008 but with time, the equity was regained by the banking sector to 12.9 percent in March 2012.