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CHAPTER 1

1.1 INTRODUCTION

1.1.1 EVOLUTION OF BANK

1.It has not so far been decided as to how the word ‘Bank’ originated. Someauthors have got the opinion that this word is derived from the words ‘Bancus’ or ‘Banque’, which mean a bench. Other authorities hold the opinion that the word‘Bank’ is derived from the German word ‘Back’, which means ‘joint stock fund’.It is therefore, not possible to decide as to which of the opinion is correct, for norecord is available to ascertain the validity of any of the opinions.2.Banking in fact is primitive as human society, for ever since man came to realizethe importance of money as a medium of exchange; the necessity of a controllingor regulating agency or institution was naturally felt. Perhaps it was theBabylonians who developed banking system as early as 2000 BC. It is evidentthat the temples of Babylon were used as ‘Banks’ because of the prevalent respectand confidence in the clergy.

1.2 HISTORY OF BANKING IN PAKISTAN

3.At the time of independence, there were 631 offices of scheduled banks inPakistan, of which 487 were located in West Pakistan alone. As a new countrywithout resources it was very difficult for Pakistan to run its own banking systemimmediately. Therefore, the expert committee recommended that the ReserveBank of India should continue to function in Pakistan until 30

September1948,so that problems of time and demand liability, coinage currencies, exchange etc.are settled between India and Pakistan. The non-Muslims started transferringtheir funds and accounts to India. By the end of June 1948 the number of officersof scheduled banks in Pakistan declined from 631 to 225. There were 19 foreign banks with the status of small branch offices that were engaged solely in export of crop from Pakistan, while there were only two Pakistani institutions, Habib Bank of Pakistan and the Australian Bank. The customers of the bank are not satisfiedwith the uncertain condition of banking. Similarly the Reserve Bank of India wasnot in the favor of Govt. of Pakistan. The Govt. of Pakistan decided to establish a1

full-fledge central bank. Consequently the Governor-general of Pakistan Quaid-I-Azam inaugurated the State Bank of Pakistan on 1

July 1948. Thus a landmark was made in the history of banking when the state bank of Pakistan assumed fullcontrol of banking and currency in Pakistan. The banking structure in Pakistancomprises of the following types.4.State Bank of Pakistan5.Commercial Bank of Pakistan6.Saving banks.7.Cooperative banks8.Specialized credit institutions.

1.2.1 COMMERCIAL BANKS

9.Commercial banks have been the most effective mobilizes of savings and have been providing short-term requirements of working capitals to trade, commerceand industry.10.Up to 31

December 1973, there were 14 Pakistan commercial banks that were performing their functions all over the country and in some foreign countriesthrough a network of branches, the name of these were:11.National Bank of Pakistan12.Habib Bank Limited13.Habib Bank (Overseas) Limited14.United Bank Limited15.Muslim Commercial Bank Limited16.Commerce Bank Limited17.Australia Bank Limited18.Standard Bank Limited19.Bank of Bahawalpur Limited20.Premier Bank Limited21.Pak Bank Limited22.Lahore Commercial Bank Limited23.Sarhad Bank Limited24.Punjab Provincial Co-operative Bank Limited2

25.All these commercial banks were nationalized in 1

January 1974, and wererecognized and merged into the following five banks:26.National Bank of Pakistan27.Muslim commercial bank limited28.Habib Bank Limited29.United Bank Limited30.Allied Bank of Pakistan31.The state bank of Pakistan is the Central bank of the country and was establishedon 1

July 1948. The separation of East Pakistan and its repercussion in the formof economic depression has caused a lot of difficulties to the banking system inPakistan. The network of bank branches now covers a very large segment of national economy. The numbers of branches have increased appreciably and thereis now one branch of bank for every 3000 heads of population approximately.There is done reasonable growth in deposits from the establishment of Pakistan.Besides this growth, specialized credit and financial institutions have alsodeveloped over the years.32.The Government of Pakistan in the late 90’s introducing the need for the privatization of state owned banks and companies. The private sector hasaccepted the challenge and most of the banks are privatized today. The State Bank of Pakistan issues the shares of these periodically. Bank employees and other common the people can also purchase these shares and earn profit. Through outthe period of banking history the banks have been expanding rapidly and achievedthe desired goal of progress.

1.2.2 Commercial Banking in Pakistan

South Asia has proved to be fertile land, not just for crops, but also for intelligent andlearned brains. People of this area have God gifted ability of mathematics andcalculations. The Indian society was quite familiar with the banking right from the beginning. Informal banking practices and banks existed in one form or the other.The English, brought with them much developed and organized banking methods and practices. Being home to nearly one third of world’s population, this region has always been the center of attention of world’s economic powers. The sense of competition3