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 These deposits can be withdrawn by cheques.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 %
|
|
2007
|
2008
|
2009
|
Dec
2010
|
March 2011
|
June 2011
|
Sept
2011
|
Dec
2011
|
March 2012
|
Growth Rates
|
YoY
|
YoY
|
YoY
|
YoY
|
YoY
|
YoY
|
YoY
|
YoY
|
YoY
|
Assets
|
18.8
|
8.8
|
15.8
|
9.3
|
11.7
|
13.7
|
17.2
|
15.0
|
16.6
|
Loans (Net)
|
10.7
|
18.3
|
2.1
|
3.1
|
5.2
|
4.7
|
3.3
|
(0.2)
|
2.8
|
Deposits
|
18.4
|
9.4
|
13.5
|
13.9
|
13.5
|
16.3
|
14.9
|
14.5
|
16.5
|
Investments (Net)
|
53.1
|
(15.4)
|
59.9
|
22.2
|
27.9
|
38.4
|
51.9
|
42.5
|
39.5
|
Equity
|
35.3
|
3.4
|
17.3
|
5.9
|
5.6
|
8.1
|
14.9
|
12.4
|
12.9
|
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.