Privatization of Banking Sector in Pakistan

(A Case Study of MCB & ABL)

Ph.D. Dissertation

Submitted to Prof. Dr. Bahadar Shah Supervisor

Researcher Bakhtiar Khan

Department of Public Administration Gomal University, Dera Ismail Khan N.W.F.P. Pakistan

Table of Contents Page No i ii iii v vi viii

Abstract Acknowledgements List of Tables List of Figures Appendix List Introduction

Chapter: 1

Introduction
1 1 3 4 8 10 10 10 11 11 12 12 13 14 15 17 18 20 21 24 24 24 26 28 33 34 35 36 42 42 45 46 48 48

1. Description of the Study 1.1 Privatization 1.2. Types and Techniques of Privatization 1.3. Privatization process in Pakistan 1.4. Steps in Privatization in Pakistan 1.4.1 Identification 1.4.2 Hiring of Financial Advisor 1.4.3 Due Diligence 1.4.4 Enacting any needed regulatory a sectoral reform 1.4.5 Valuation of property 1.4.6 Pre-Bid and Bid Process 1.4.7 Post-Bid Matters 1.5 General Objectives of Privatization 1.6. Modalities of Privatization in Pakistan 1.7. Implications of Bank Privatization 1.8. Privatization of Banks 1.9. Privatization of Banks in Pakistan 1.9.1 Muslim Commercial Bank Limited. 1.9.2. Allied Bank Limited 1.9.3 Overview 1.9.4 Historical Background 1.9.4.1 Pre- Nationalization Stage 1.9.4.2 Nationalization Stage 1.9.4.3 Privatization Stage 1.10. Objectives of Privatization of Banks 1.11. Scope of the Study 1.12 Objectives of Study 1.13. Methodology

Chapter: 2 Literature Review

2.1 2.2 2.3 2.4 2.5 2.6 Introduction Privatization of Banks and its Efficiency Privatization of Banks and its impact on Economy Privatization of Banks and its impact on Employees Privatization of Banks and its impact on Customers Privatization of Banks and Regulation

Chapter 3: Privatization of Banks and Its Impact on Efficiency

3.1 3.2 3.3 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.3.8 3.3.9 3.3.10 3.3.11 3.4. 3.4.1 3.4.2 3.4.3 3.4.4 3.4.5 3.4.6 3.4.7 3.4.8 3.4.9 3.5 3.6 4.1 4.2 4.3 4.4 4.4.1 4.4.2 4.4.3 4.4.4 4.4.5 4.4.6 4.4.7 4.4.8 4.5 4.5.1 4.5.2 4.6 4.6.1 4.6.2 Introduction Data Envelope Analysis Efficiency gains of two banks, MCB & ABL Transaction Cost Asset Quality Risk Measurement Interest Rate Risk Capital Risk Capital Adequacy Measurement Interest Rate Spread Intermediation Proxies Management Competence Earning and Profitability Liquidity Management Comparative study of Private vs. Public Bank Introduction Ratio used in Analysis Earning Assets to Total Assets Return on Earning Assets Interest Margin to Total Assets Loan Loss Coverage Ratio Equity Capital to Total Assets Deposit Time Capital Loans to Deposits Findings Conclusion Introduction Privatization of Banks and its Impact on Economy Hypotheses Investment Effect of Freezing of Foreign Currency Accounts Effects of Nuclear Tests on Investment Role of Banks Intermediating Foreign Capital Inflows Hesitation on the Part of Foreign Investors Pakistan Financial Markets Efficiency Liberalization in Pakistan to Ensure Inflow of FDI Modes of Financing in Pakistan Deposits Test of Sub-hypothesis No 1 Results of Sub-hypothesis No. 1 Findings Test of Sub-hypothesis No. 2 Results of Sub-hypothesis No. 2 Findings 49 54 57 57 59 61 62 62 63 64 68 69 70 71 73 73 74 74 74 74 75 75 76 76 83 84 89 91 94 95 96 96 97 97 97 98 99 99 101 102 103 104 105 106

Chapter 4: Privatization and its Impact on Economy

4.7 4.8 4.9 5.1 5.2 5.3 5.3.1 5.3.2 5.3.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 6.1 6.2 6.3 6.4 6.5 6.5.1 6.5.2 6.6 6.7

Impact of MCB & AQBL on Economic Growth Privatization and Fiscal Deficit Conclusion Introduction Does Privatization Affect Labor? Characteristics of Labor Market in Pakistan Overstaffing Generous Pay and Benefits Labors Union Influence Privatization Employment Impact Labor Force Reduction New Jobs Creations Factors, which will determine the extent of that impact Protection of the Interest of the Workers Findings Conclusion Introduction Characteristics of Commercial Banks in Pakistan Customers Problems Challenges faced by Commercial Banking in Pakistan Emergence of New Products Consumer Financing Consumer Financing Products Impact on Customers Conclusion

106 107 109 111 111 114 114 114 115 115 116 119 120 120 129 130 132 132 133 133 135 135 136 138 144 146 147 147 152 153 153 177 179 183 184 187 191 192 193

Chapter 5: Privatization of Banks and its Impact on Employment

Chapter 6: Privatization of Banks and its Impact on Customers

Chapter 7: Regulatory Environment for Privatization of Banks

7.1 Introduction 7.2 Regulatory Reforms 7.3 Pre-Privatization Activities 7.4 State Bank of Pakistan 7.5 Legislative Agenda 7.5.1 Banking and Financial Sector 7.6 Conclusion Chapter 8: Summary and Conclusion 8.1 Summary and Conclusion 8.2 Bank Privatized so far 8.3 Achievements of the Study 8.4 Conclusion 8.5 Implications of the Study 8.6 Recommendations 8.7 Suggestions for Further Research Bibliography

Appendixes

List of Tables
Page No

Chapter 1:
1.1 1.2 1.3 1.4 1.5 Number of Privatized Transactions in Pakistan Pre privatization Structure of Banking Sector Information on Banking Privatization Information on Banking Privatization, Classified by Offering Types Research Paradigm 6 19 32 33 41

Chapter 3:
3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 3.21 Summary measures for Efficiency MCB Before Privatization MCB After Privatization ABL Before Privatization ABL After Privatization Transaction Cost Risk Management Capital Risks Capital Adequacies Intermediation Proxies Management Competency Earning and Profitability Liquidity Indicators Ratios for MCB Percentage Change in Ratios Ratios for ABL Percentage Change in Ratios Ratios for UBL Percentage Change in Ratios Comparisons Financial Indicators of MCB Financial Indicators of ABL 55 55 56 56 58 62 63 64 68 70 71 72 77 77 78 78 79 79 81 82 82

Chapter 4:
4.1 4.2 4.3 4.4 4.5 Data for Sub-hypothesis No. 1 Data for Sub- hypothesis No. 2 Performance of MCB for Pre and Post Privatization Periods Performance of ABL for Pre and Post Privatization Periods Fiscal Indicators 101 104 106 106 108

Chapter 5:
5.1 5.2 5.3 Bid Values and Payments on Gold Handshake Scheme Growth Rate of GDP, Investment and Employment Number of Employees, Pre and Post Privatization of MCB 118 118 123

5.4 5.5 5.6 5.7 5.8 5.9

Number of Branches Pre and Post Privatization of MCB Annual Operating Cost Pre and Post Privatization of MCB Number of Employees, Pre and Post Privatization of ABL Number of Branches, Pre and Post Privatization of ABL Annual Operating Cost Pre, and Post Privatization of ABL Structure of Banking Sector in Pakistan, Pre and Post Privatization

124 125 126 126 127 128

Chapter 6:
6.1 6.2 6.3 6.4 6.5 6.6 Details of Consumers Products Distribution of ATM (in numbers) Consumers Knowledge about privatization of Banks Changes in Bank Employees Behavior Consumer Awareness about Banks New Products and Services Costumer Views about Operation of New Products and Services 136 138 139 141 142 143

Chapter 7:
7.1 7.2 7.3 7.4 Classification of Credit Cards Advances Classification of Auto Loans Classification of Mortgage Loans Classification of Personal Loans 171 173 175 177

List of Figures
Page No

Chapter: 1:
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 Source of Proceeds Distribution of Precedes Steps in Privatization (Pakistan) Steps in Transaction MCB ABL ABL ABL Pre -privatization Structure of Banking Sector Global Privatization Proceeds Privatization Proceeds by Region Post Privatization Structure of Banking Sector 7 7 8 9 21 22 23 23 27 29 29 30

Chapter 3:
3.1 3.2 3.3 3.4 3.5 Banks Efficiency Model Percentage of Provision for MCB to Total Advances Percentage of Provision for ABL to Total Advances Spread Rate Before Privatization Spread Rate after Privatization 57 60 60 65 65

Chapter 4:
4.1 4.2 4.3 4.4 4.5 Inflow of Foreign Investment in Pakistan Deposits of Schedule Banks Scatter Diagram for Hypothesis No. 1 Scatter Diagram for Hypothesis No. 2 Budget Deficit 99 100 102 105 108

Chapter 5:
5.1 5.2 5.3 5.4 5.5 Number of Employees for MCB Before and After Privatization Number of Branches for MCB Before and After Privatization Operating Cost of MCB Before and After Privatization Operating Cost of ABL Number of Banks Before and After Privatization 123 124 125 127 128

Chapter 6:
6.1 6.2 6.3 6.4 6.5 6.6 6.7 Number of Credit Cards Number of Online Accounts Number of ATM Customer knowledge about Privatization of Banks Employees Behavior with Customers Customers Awareness about Bank New Products Customers Views about Operation of New Products 137 137 137 139 141 142 143

List of Appendix Page No 1.1 1.2 1.3 3.1 3.2 3.2 3.3 3.4 3.5 3.6 3.7 4.1 4.2 4.3 Financial Sector of Pakistan List of Privatization Proceeds in Pakistan List of Up Coming Transactions DEA Calculation Financial Statement of Both Banks for Both Periods Transaction Cost Particulars of the Provision Against NPLs Risk Measurement Capital Adequacy Ratios Liquidity Management Earning and Profitability Foreign Investment Inflow in Pakistan Test of sub Hypothesis No 1 Test of sub hypothesis No 2 218 222 226 227 228 237 238 240 241 246 247 249 251 252

Acronyms ABL ADB ATM BOOT BOO CCOP DEA DFIs EOI FA MCB NPAs NPLs PC RFP SBP SOEs SOQ UBL Allied Bank of Pakistan Limited Asian Development Bank Automated Teller Machine Build-Own-Operate and Transfer Build-Own-Operate Cabinet Committee on Privatization Data Envelopment Analysis Depository Financial Institutions Expression of Interest Financial Advisor Muslim Commercial Bank Non Performing Assets Non Performing Loans Privatization Commission of Pakistan Request for Proposal State Bank of Pakistan States Owned Enterprises Statement of Qualification United Bank Limited

Privatization of Banking Sector in Pakistan

Case Study of MCB & ABL
By Bakhtiar Khan

ABSTRACT

The present study aims at examining the privatization of banking sector in Pakistan, its impact on efficiency, economy, employment and new products and services as well as on legal environment. For this purpose economic model was used to judge efficiency of banking sector for pre-and- post period of privatization.

The model shows that banking sector in Pakistan after privatization of few banks improved its efficiency. Liquidity ratios of the banks have improved. Numbers and values of deposits have increased. Profitability of the banks increased. Value of non-performing loans is controlled. However, spread rate is still higher as compared to pre-privatization period. New products and services have been created to facilitate the customers.

Impact on economy, in the sense of mobilization of savings, increase in loan advances and credit, as well as investment have shown an upward trend. Quality of assets of all banks has improved.

The study shows that the numbers of employees have decreased in banking sector but this decrease is not alarming. The salary and remuneration to management / employees show increase; meaning better return to services of employees.

For a new vision of the banking sector and to prevent financial mishaps in future, the State Bank of Pakistan and Government of Pakistan are required to develop a new regulatory system for privatized banks.

Acknowledgements

First of all, the scholar offers his most humble gratitude to ALMIGHTY ALLAH, Who is the Omnipresent, the Omnipotent and the Omniscient, created the universe and bestowed the mankind with knowledge and wisdom to search for secrets. I earnestly bow before His Compassionate Endowment.

I am deeply indebted to my supervisor, Dr. Bahadar Shah, for his guidance, encouragement and sustained interest in my study. I must express my gratitude to Dr. Gohar Zaman and Prof. Gul Nawaz for helping me in model development and research methodology.

My special thanks are due to my friends, Dr. Saeed Anwar, Dr. Azim and Haji Saadullah Jan for encouraging and supporting me during this research.

I would like to take the opportunity to express my gratitude to my wife whose support made this goal possible.

INTRODUCTION

The economic history has witnessed waves of nationalization and privatizations, both being defended on similar social and efficiency grounds. Theoretical models can hardly distinguish between efficiency superiority of different ownership arrangements. It is generally accepted that it is competition and effectiveness of regulation, not ownership that makes difference from an efficiency point of view (Vickers and Yarrow, 1988; Adaman, 1993). The concept of "privatization" has not been yet clarified in both theory and practice (Bailey, 1987; Kay and Thompson, 1986). As noted by R.W. Bailey, "one of the concepts in vogue is privatization. Although the concepts itself is unclear, it might be tentatively defined as a general effort to relieve the disincentives toward efficiency in public organizations by subjecting them to the incentives of the private market. There are in fact several different concepts of privatization" (Bailey, 1987; 138). J.A. Kay and D.J. Thompson also agree with Bailey by noting, "privatization is a term which is used to cover several distinct, and possibly alternative means of changing the relationships between the government and private sector" (Kay and Thompson, 1986; 18).

Privatization is frequently used referring to the sale of a publicly owned enterprise (POE)'s asset or shares to the individuals or private firms. However, this definition gives only a narrow meaning of privatization. In broader meaning, it refers to restrict government's role and to put forward some methods or policies in order to strengthen free market economy. The former meaning of privatization, i.e. the sale of a POE's assets or shares to the private sector is mostly called "denationalization". These two terms -privatization and denationalization- are mostly confused and sometimes used interchangeably in the literature, As a matter of fact; denationalization is just one method of privatization. Government's role and functions can also be reduced or can be wholly terminated by implementing some other methods. The broad meaning of privatization is which encompasses the

methods or policies, which aims to strengthen free market economy and to reduce the role of the government in the national economy. The recent past has seen economy. fundamental changes in the governments role in

With the defeat of socialism and the worldwide onslaught of

privatization a new scenario is emerging. The direct role of government is shrinking and its indirect role is increasing. Arguably, privatization does not necessarily means no government, but rather better government, Web Site, Islam On Line (The role of government in the economy) Downloaded from internet 5, Jan., 2002. The globalization and deregulation of financial markets and privatization of banking sector will play major role in increasing efficiency, cost effectiveness and innovation of new products due to competition. See Stigler (1975); Wolf (1979); Baumol (1996), and Kamal (1996). Even small improvements in efficiency

generate significant gains in the sector it self. More important, improved provision of financial services allows greater efficiency in nearly all other sectors: by expending the rang and quality of financial services; by allowing transactions that would otherwise not occur; by facilitating firm entry and competition in other sectors; and by improving export competitiveness. It can encourage savings, and can lead to more efficient use of savings. The empirical evidence strongly shows that an efficient financial services sector enhances economic growth (see Levine 1997). It also gives financial firms access to new technologies and ideas to help them raise efficiency.

The existence of an efficient and well functioning financial sector is important for the effective operation of all economies. The borrowing and lending activities of this sector ensure that corporations in the real sector of economy have access to fund they needed for investments and generate output, exports and jobs. The process of financial deregulation and privatization has the prime objective of making the financial sector work more effectively in meeting the needs of the real sector of economy. Privatization will encourage higher production, improve service coverage and quality, promote market-based prices, attract capital and better management, reduce fiscal hemorrhaging, use proceeds to retire national debts,

ii

strengthen domestic capital markets, broaden ownership base and reduce opportunities for corruption. In other words the GOP aims at fostering competition to allow the customers/consumers to enjoy the benefit of the privatization. ( Shabbir A KAZMI, 2001). Privatization of government enterprises has taken place nearly 100 countries; the United Kingdom has established a clear reputation as the leading source of expertise in the fields. ( Bishop, Matthew. R and kay, John A. 1989). Privatization efforts in Pakistan began in 1988, with the floatation of 10% shares of Pakistan International Airlines (PIA). Between 1988 to 1990, privatization was pursued with view to divest 14 loss making units and raise funds by selling shares of profit making manufacturing units for retiring public debts and reducing debt servicing. Process of privatization picked up only after setting up of the Privatization Commission in 1991.

The problems of Pakistans banking sector were rooted in a failure of governance and lack of financial discipline owing to undue political interference in the financial intermediation process, especially in the NCBs and DFIs. NCDs and DFIs were the major source of bad loans accounting for the 90% of the bad loans in the entire system and were the main loss makers. Pakistan banking reforms were aimed to strengthen the sources of governance and financial discipline for banking sector, namely bank regulators, markets, the courts and bank owners, by enhancing the authority and ability of the central bank to supervise banks and enforce regulations, promoting market integration and competition, improving the legal and judicial processes for enforcing financial contracts, and initiating corporate governance reforms in the NCBs and DFIs. Two banks, namely MCB and ABL were privatized in 1991, which was start of privatization process of the financial sector of the country

The study will review the political, ideological, economic arguments and considerations concerning privatization. It will provide theoretical background on

iii

the process of privatization, incentive and efficiency in the public and privatized banks and its impact on economy.

The study aims to explore answers to the questions:

Does Privatization Improve Efficiency and gives birth to New Products? What will its Impact on Economy? Impact on Employees Welfare. Impact on Customer Services. Regulation with Changing Environment

Research Outlines:

Chapter First Chapter first describes the pilot review of the present research work consists on introduction, overview, methodology and objectives of the study. Overview is divided into three parts. Banking sector at the time of independence, nationalization and privatization.

Chapter Two Chapter two is based on literature review about the research issues.

Chapter Three. Chapter three is based on analysis of efficiency using theoretical framework called TARSCIMAL. Different operating ratios are used to evaluate efficiency of two banks selected as a case study. DEA is used for two banks for pre and post privatization period.

iv

Chapter Four In chapter four of the study we have examined the economic impact of privatization of banks. Two main hypotheses and some sub hypothesis were developed to evaluate the privatization of banks and its impact on economic growth.

Chapter Five Chapter five is based on staff welfare. We have analyzed the number of staff before privatization and after privatization of two banks and their salaries and the service environment.

Chapter Six Chapter six is based on primary data about the views of customers for both pre-and post periods of the privatization of these two banks. Semi

structure interviews were taken from different customers of these two banks in different areas to collect their change in views with changing structure of these two banks.

Chapter Seven: Chapter seven provides the legal framework adopted by the Pakistan government for privatization of banks along with its pros and cons.

Chapter Eight Summary and conclusion of the study is narrated in this chapter.

CHAPTER 1 1. Description of The Study 1.1 Privatization Nationalization was common during the immediate post World War 2 period, but privatization became a more dominant economic trend (especially with in the United States and the United Kingdom during the 1980s and 90s). The trend of privatization has often been characterized as part of wave of neoliberal policies, and some observers argue that this was greatly influenced by the policies of Reagan and Thatcher. (William L. Megginson, 2000). The term privatization was coined in 1948 and is thought to have been popularized by the economist during the 80s; perhaps the most discussed privatization case has been the privatization of British Railways. (Downloaded from www.E-paranoids.com. Feb.10, 2002). Privatization of state-owned enterprises (SOEs) has been an essential part of the economic reform process that started in the 1980s in both the developed and developing countries. It was related to the changing role of government in economic development process. The rationale for privatization emanated from the experience that in many countries, SOEs had not lived up to their development expectation. Due to many inherent problems, scarce resources were being less efficiently used, and their fiscal implications were mounting. In response to these problems, government increasingly recognized the need to get out of economic activities that competitive markets do best than government interventions. The privatization and deregulation policy is a key component of the economic reforms with a view to creating a liberal economic environment for rapid industrialization and accelerating the pace of economic development. Privatization in general means transfer of ownership of a state-owned enterprise (SOEs) to private enterprise along with control over its management. Privatization is a very broad termbut simply means the transfer of assets or service delivery from the government to the private sector. Privatization runs a very broad range, sometimes leaving very little government involvement, and at other times creating partnership between government and private service providers where government is still the dominant player. 1

Privatization (sometimes: denationalization, privatization or- especially in Indiadisinvestments) is the economic process of transferring property, from public ownership to private owner ship. An opposite process is nationalization. In theory, privatization helps establish a free market as well as fostering capitalist competition, which its supporters argue will give the public better choices. Conversely, socialists view privatization negatively, arguing that entrusting private businesses with control of essential services reduces the publics control over them, and will result in unemployment and corruption. (Downloaded from www.E-paranoids.com. Feb.10 2002). Some important definitions given by different authors or agencies are as under: In the sense of government executives the meaning of privatization has the following shades. According to, Elaine Kamarck When we talk about privatization, we do not mean contracting out, we mean purely divesting the Government function. (.Paul Starr, 1989, The meaning of Privatization,). Most definitions of privatization, though, are more extensive, covering virtually any actions that involve exposing the operations of the government to the pressures of the commercial marketplace. That would include every thing from contracting out janitorial services. (ADB, 1999) The boarder definition of privatization also includes a wide range of publicprivate partnerships, such as voucher systems. Even the creation of federal corporations, quasi government organizations and governmentsponsored enterprises is often filed under the general category of privatization. In such organizations, though it is often difficult to tell where government ends and Private sector begins. (Kazmi. H. Bashir 2001) In broad meaning, privatization refers to the transfer of functions previously performed exclusively by the public sector, to the private sector. In other words, 2

privatization is an umbrella term, which encompasses all methods or policies implemented to increase the role of market forces within the national economy. In this context, the concept of privatization covers several arrangements to deliver goods and services by private sector. In the following, these arrangements are explored. (Prof.Dr.Cokun Can Aktan, 1987)

Broadly defined, privatization is the abolition of barriers to private sector provision of services or the infrastructure necessary for their delivery. The broad definition refers to privatization at sector level (e.g., telecommunication, electricity, social security, etc.). It is more complex than enterprise level privatization as it often involves restructuring of a whole sector and not just one firm. It involves giving the private sector the right to use or access the public domain (radio spectrum, land, right of way, etc.) to build and operate a network industry. It also involves defining the public service dimension and licensing the private sector to deliver such services. The broad definition of privatization requires putting in place legal and regulatory mechanisms to ensure that private providers do not overlook the public dimension of the services they are licensed to deliver and do not fail to meet pre-announced policy objectives (coverage, access, etc.) (Kamal S. Shehadi, 2002).

1.2: Types and Techniques of Privatization Management Privatization means corporatization and commercialization of public services. Corporatization refers to changes in the legal form of utilities by incorporation under the different legal and accounting code to that of the public service. It may be linked to or precede the sale of assets. Commercialization is a boarder term referring to the importation of accounting and management practices devised in private companies into public organizations including, for example, moves to transfer a greater responsibility for payment of services from government to service users. 3

Capital privatization through the sale of whole operating units, or industries; or partial sale of a utility, usually by selling a proportion of its shares. Contracting out Including concession and leasing contracts. The state normally retains ownership of the assets and continues to fund the services, but the operation utility is transferred to private operator or contractor, with the result that labor is the main factor privatized. Finance privatization private funding of public infrastructure through such schemes as Build-Own-Operate-and-Transfer (BOOT) and Build-Own-Operate (BOO). Under BOOT schemes the private developer/consortium funds, builds, owns, operates, and maintains a facility. It operates the facility over a fixed term, during which it can charge users through fees or other appropriate means. At the end of the fixed term the facility is transferred to the government or agency. BOO schemes are similar, with the exception that the facility is not transferred back to the government at the end of the contract. Deregulation through removal of regulations governing entry to, or operations within, an industry. Whereby state regulations governing or limiting the terms of entry to or operation within an industry are removed or reduced. (Oestmann, 1994, Rondinelli, Dennis and Max Iacono. 1996).

1.3: Privatization Process in Pakistan Privatization efforts began in earnest after the creation of Privatization Commission (PC) on January 22, 1991. Although the Privatization Commission mandate initially restricted to industrial transactions, by 1993 it had expended to include power, oil and gas, transport (aviation, railway, ports and shipping), telecommunications and banking and insurance. The privatization process, which is aimed at selling government property in an 4

open and transparent manner with a view to obtaining the best possible price, varies somewhat depending on the nature of the asset being privatised, on the proportion of shares being offered for Privatization, and on whether a transfer of management is involved. The Board of the Privatization Commission decides what kind of process will be followed. The question at the present situation is not whether or not to privatize; it is rather how the privatization should take place providing adequate safeguard of the interests of all parties - workers, employers and the general public. Interests of the public and the workers would be safeguarded only when there is periodic examination of the methods of privatization and when there is a greater degree of discussion on the ways in which social consequences are to be dealt with. Public consensus as far as possible on the methods of privatization would ensure not only the success in privatization but also equitable distribution of the fruits of such success. Such equitable distribution can take place only when the restructuring of the public enterprises before or after privatizations takes into consideration the social effect and proceeds with the approach and mechanism that will ensure that adverse effects on the interests of the workers are handled through discussion and consensus. During January 1991 to June 2002 the Commission completed 121 transactions for Rs. 79.061 billion. Table 1.1 is giving privatization transactions in Pakistan. Then Table is divided in three different periods, i.e. 1991-June 2002, July 2002 June 2003 and July 2003 May 2004. The table also shows total number of transactions in all sectors with their values in rupees in millions. Figure 1.1 shows total proceeds in percentage and Figure 1.2 shows distribution of total proceeds in rupees in billions. (See appendix 1.2 for total proceeds including name of purchaser and value of transaction etc).

Table.1.1

Number of Privatized Transactions in Pakistan (Rs. In Million)

1991 to June 2002 Jul2002 to Jun 2003 Amount No 5644 1300 20898 30558 1102 2 9383 187 768 326 87 270 594 154 79061 11 22211 1 1 10 1211 530 35044 81 1 815 1 1048 6 2 8 To Jul 2003 to May 2004 Amount No Amount No 12970 8421 1 3 22409 9759 7 14 12 2 7 13 18 7 22 23 2 5 4 6 Date

Sector Banking

No 4

Amount 41023 19482 20898 30558 1102 8838 10204 187 849 326 87 270 1805 687

Capital Markets 3 Transaction Energy 12 Telecom Automobile Cement 2 7 11

Chemical/fertilizer 16 Engineering Gee Miles Rice/Roti Plant Textile Newspapers Tourism Others Total 7 21 23 2 5 3 5 121

142 136316

Source: Privatization Commission of Pakistan 6

F igure 1.1: Sources of P roceeds

B anking & C apital M arket T ransactions 33% E nergy 19%

Industrial & O ther 20%

T elecom 28%

Source: Privatization Commission Annual Report, 2003

F igure 1.2: D istribu tion of P roceed s R u pees in B illion

5 5

64

16

R eturn ed to SO E R estru cturing E xpense

P rivatisatio n E xpense R eturned to G O P

Source: Privatization Commission Annual Report, 2003

1.4

Steps In Privatization

Figure 1.3

1: Identification 2: Hiring of a financial advisor 3:Due Diligence 4: Regulatory Reform

7:Post Bid Matters

6: Pre-Bid and Bid process

5: Valuation of property

Source: Privatization Commission Annual Report, 2003

Figure 1.4

Steps in a Transaction with Transfer or Management or Sale of Asset or Business

Source: Privatization Commission Annual Report, 2003

1.4.1 Identification 9

The first step is the identification of the entity or list of entities to be privatised. In a typical transaction, the Privatization Commission, in consultation with the relevant ministry, submits a Summary of the proposed transaction to its Board. The Summary justifies the need for privatizing the property, outlines the likely mode of privatization, and sometimes seeks guidance on issues relating to such matters as pricing, restructuring, legal considerations, and the regulatory framework. Once endorsed by the Board, it is submitted to the Cabinet or its subcommittee, the Cabinet Committee on Privatization, (CCOP) for approval.

1.4.2 Hiring of a Financial Advisor In major transactions, the process to hire a financial advisor (FA) is carried out by the transaction manager with the approval of the Board. Terms of reference for the financial advisor are finalized; expressions of interest from prospective FAs are solicited, an evaluation team is constituted, and short listed firms are invited to submit technical and financial proposals in a common format. The evaluation team scores the technical proposals and the highest ranked firm based on both technical and financial scores is invited for contract negotiations and signing. In November 2001, the Board approved regulations for hiring a financial advisor in order to make more transparent the procedures that were largely being followed over the last decade.

1.4.3 Due Diligence The next step is to carry out the legal, technical, and financial due diligence. This is aimed at identifying any legal encumbrances, evaluating the condition of the assets, and examining the accounts of the company in order to place a value on the company. For most industrial units and some small transactions, this is done using in-house transaction managers and staff, or by sub-contracting out part of the work to a domestic legal, technical, or accounting firm. However, for major privatizations in banking, 10 infrastructure, or utilities, the FA carries out this function. Following due diligence, the

FA finalizes the privatization plan. This may include recommendations on any needed restructuring, in addition to specifying the amount of shares or assets to be privatised. For major privatizations or when the proposed privatization mode is different from the initial plan, the plan is then submitted to the Board, the Cabinet Committee on Privatization (CCOP) or the full Cabinet for approval.

1.4.4 Enacting any Needed Regulatory and Sectoral Reforms For many major transactions, the ability to privatize and the amount of proceeds realizable depend critically on the level of regulated prices for the public enterprises inputs or outputs and other sectoral or regulatory policies. For many monopolies or quasi-monopolies, the rules of the game specifying the competition framework postprivatization, the manner and type of regulation, and the institutions regulating them are key to investor interest. In addition to rules determining prices or tariffs, there may be rules determining standards, penalties for non-compliance, the extent, form and timing of any proposed deregulation, and the evolving structure of the market following liberalization. Clarification of these rules and passage of needed laws and regulations will often be necessary before taking the transaction to market.

1.4.5 Valuation of Property In order to obtain an independent assessment of the value of the property being privatised, the Commission relies primarily on external firms. The Financial Advisor, where engaged, carries out the valuation to obtain a reference price for the property. In other cases, the Commission contracts with an external valuation firm or accounting firm as specified in the rules on the valuation of property, which can be obtained from the PC website. The methods used for the valuation vary with the type of business and often more than one method is used in determining the value. These include the discounted cash flow method, asset valuation at book or market value, and stock market valuation. Despite using scientific methods, valuation remains more an art than a science. The true 11

value is dependent on many difficult to quantify variables such as country risk, corporate psychology and strategy, investor specific synergies and perceptions of future macroeconomic performance. Only the market can determine the true value. Therefore it is important to focus on designing appropriate transaction structures, on advertising in relevant media, in choosing and implementing appropriate pre-qualification criteria for bidders, and in following an appropriate bidding process to obtain a fair price for the privatization.

1.4.6 Pre-bid and Bid Process Expressions of Interest (EOI) are invited by advertising in the relevant media. The PC Ordinance 2000 spells out some of the advertising procedures. Depending on the kind of transaction, the EOI describes the broad qualifications that potential bidders must possess. Those submitting an EOI and meeting the broad qualifications are provided with the Request for Proposal (RFP) package, where required, containing the detailed prequalification criteria, instructions to bidders, draft sale agreement, and other relevant documents. Interested parties then submit a Statement of Qualifications (SOQ), which is evaluated to determine whether an interested party meets the requisite qualifications. Pre-qualified bidders are then given a specified period to conduct their own due diligence, following which they are invited to pre-bid meeting(s) where their questions and concerns can be addressed. The meetings are useful in determining the bidding procedure to be followed (for example, open auction, sealed bids, or some combination) and could even determine the proportion of shares that the Government may want to offload. The bidding itself is done openly, with all bidders and media invited.

1.4.7 Post-bid Matters Following bidding and identification of the highest bidder, the Board of the PC makes a recommendation to the CCOP as to whether or not to accept the bid. The reference price is a major determinant in the recommendation, although the Board may recommend the 12

sale even if the offer price is below the reference price. Once the bid price and bidder are approved, the PC issues a letter of acceptance or a letter of intent to the successful bidder, indicating the terms and conditions of the sale. Following negotiations with the bidder, the PC then finalizes the sale purchase agreement, collects the sale proceeds, and transfers the property. Under PCs current policy, privatization proceeds are generally required to be paid upfront rather than over time, however, transaction specific exceptions are possible as had been the case for many earlier transactions. Within 30 days of the sale, the PC is required to publish the summary details of the transaction in the official gazette. In summary, the privatization process is lengthy for major transactions, mainly to assure transparency in the process. After receiving CCOP approval for the privatization, it typically takes about 18 months to close a major transaction, even when no major restructuring of the company is required. This includes about six or seven months to appoint a Financial Advisor and another three or four months for the FA to complete its legal, technical and financial due diligence and to propose a privatization strategy. Following approval of the strategy, the marketing and bidding process may take five or six months (valuation efforts proceed in parallel), while it may take another two months after bidding to obtain approvals, finalize sale documents, and close the transaction. Delays in Privatization are often caused by waiting for the necessary regulatory framework and sectoral policies to be put in place and for any needed restructuring to occur. In addition, resolution of transactional and interministerial issues often results in causing delays in the bidding process. (Privatization Commission annual report,1998).

1.5 General Objectives of Privatization

The stated objectives of the privatization process can be broadly categorized in three main groups: -

Economic objectives: 13

(1) (2) (3) (4)

Improve the overall efficiency of the economy Improve the efficiency, productivity and profitability of firms; Improve the quality of products and services; and Attract foreign investors. Fiscal objectives:

(1) (2) (3)

Reduce government subsidies to public enterprises; Raise money from the sale of public enterprises; and Increase tax revenue from private enterprises. Social and political objectives:

(1) (2) (3) (4) (5)

Improve the welfare of the society; Promote the ownership of private enterprises by nationals; Create a property-owning middle class; Increase total employment in the economy; and Reduce corruption and the abuse of public office.

1.6: Modalities of Privatization in Pakistan The privatization policy of 1998 outlined the following four modes of privatization to be adopted for public sector enterprises.

1. Total Disinvestments Through Competitive Bidding. This involves the sale of 100 percent shares of a public sector enterprise to a strategic investor through process of competitive bidding.

2. Partial Disinvestments with Management Control. 14

In this method, a percentage of the shares of a public sector enterprise are sold to a private investor or group of investors and management control is also transferred to the party. 3. Partial Disinvestments Without Management Control. This entails the sale of a percentage of the shares of a public sector enterprise to private investors, while the government retains management control. 4. Sales/Lease of Assets and Property. The assets/properties are sold or leased out to any party.

1.7. Implications of Bank Privatization There are two views about privatization of government owned enterprises. The arguments against privatization are that selling assets of the state are not wise decision. However, it is now common, in developing countries, that the IMF and World Bank make privatization of economic enterprises a pre-condition for balance of payments support, and for development aid. This withdrawal of government ownership and control of economic enterprises is what is here meant by the term 'privatization'. This demand for the state to withdraw from economic enterprise, and to hand over to public or private companies, has even extended to public utilities such as companies concerned with water and electricity supply, telephones and banking. The same is the case with Pakistan. Government of Pakistan is compelled to start privatization of state owned enterprises including banks to obey the order of the lenders i.e. IMF, World Bank etc. etc. (Sara Hupekile Logwe. 2003) The rationale behind this IMF demand is three-fold. Firstly, it is said that the administration of parastatal companies is more bureaucratic and inefficient, because they operate like government bureaucracies, and are protected by government from having to adapt to competition and market forces. Secondly, they are more likely to be internally corrupt, for example by having inflated payrolls to provide employment to relatives and placement of government officials. Thirdly, their revenues and assets are likely to be 15

diverted by corrupt government officials who gain external control over company decision making. All three of these factors lead to parastatals that provide services and commodities at uncompetitive prices, and also lead to low productivity and loss making, and to the ultimate collapse of the enterprise if exposed to competition in a free market. ( Sara Hlupekile Longwe, 2003) Opponent of privatization dispute the claims made by proponents of the privatization, especially the one concerning the alleged lack of incentive for government to ensure that the enterprises they own are well run, on the basis of the claim that government must answer to the people. It is argued that a government runs nationalized enterprises poorly will lose public support and votes, while a government that runs those enterprises well will gain public support and votes. Thus, democratic governments, under the argument, do have incentive to maximize efficiency in nationalized enterprises, due to the pressure of future election. The opponents of the privatization are giving following arguments against the privatization. Private Companies do not have any goal other than to maximize profit. The public does not have any control or over sight of private company. A centralized enterprise is generally more cost effective than multiple smaller ones. Therefore, splitting up of company into smaller private chunks will reduce efficiency. Privatization will not result in true competition if a natural monopoly exists. Profits from successful enterprises end up in private pockets instead of being available for the common good. Nationalized institutions are usually granted against bankruptcy by the state, they can therefore borrow money at lower interest rate to reflect the lower risk of loan default to the lender.

16

In case where public services or utilities are privatized it can create a conflict of interest between profit and maintaining a sufficient service. A private company may be tempted to cut back on maintenance or staff training etc. to maximize profit.

A public service may provide public goods that, while important, of little market value, such as the cultural goods produced by public television and radio.

1.8: Privatization of Banks

In the last fifteen years privatization has become a central element of the structural reform agenda in developed and developing countries alike. Indeed, it is now quite difficult to find a country that has not embarked on a program to divest some or all of its state-owned enterprises (SOEs) or to involve the private sector in their management, ownership, and financing. During the past 15 years, over 250 commercial banks have been fully or partially privatized by governments of 59 countries either publicly through a public offerings of shares, or privately through an asset sales. In almost every case, this represented a fundamental break with a national past that emphasized the strategic role of commercial banking in funding the nations economic development, and the national government s key role in planning and directing that development. (William L. Megginson, 2003). See Table 1.3 for summary information on banking privatizations (1980-2003) in OECD and developing countries and table 1.4 for summary information on banking privatization, classified by offering type for (1985-2003).

1.9. Privatization of Banking Sector in Pakistan Financial sector significantly altered in early 1970s with nationalization of domestic banks under the Banks Nationalization Act 1974. The Pakistan Banking Council was set up to act 17

as holding company of nationalized commercial banks and to exercise supervisory control over them. By end of 1980s, the pre-dominance of public sector in banking and non-bank financial institutions together with instruments of direct monetary control was contributing to financial repression, financial sector inefficiency, crowing out of private sector and deteriorating quality of assets. State Bank of Pakistan role as a central bank had been considerably weakened due to presence of Pakistan Banking Council. Duplication of supervisory role was diluting SBPs enforcement of regulations over nationalized commercial banks. At the onset of 90s, the Banking Sector in Pakistan was dominated by the public sector banks, which were characterized by:

High intermediation Costs Over-staffing and over-branching Huge portfolio of non performing loans Poor Customer Services Undercapitalized Poorly Managed/Narrow product range Averse to lending to SMEs/ Housing and other segments Undue interference in Lending, Loan recovery and personnel issues.

The dominance of public sector banks at the beginning of the nineties was apparent with a share of 92.2 percent in total assets (See Table 1.4) of the banking sector. The remainder belonged to foreign banks, as domestic private banks did not exist at that time. Similarly, high shares existed for deposits and equity of the public sector banks. With these characteristics, the banking sector at the end of FY90 did not provide a level playing field for competition and growth.

18

Table 1. 2 Pre-Privatization Structure of Banking Sector in Pakistan

The Government of Pakistan has decided to privatize the public sector banks because of lack of financial discipline owing to undue political interference in the financial intermediation process. The public sector banks were the major sources of bad loans, accounting of 90% of bad loans in the entire system, and were the main loss makers. (Ishrat Hussain, 2003). Public sector banks were used for politically motivated retribution and game of horse-trading on national and provincial level. The privatization process initiated in the early 1990s as part of economic reforms programme and in 1991, Privatization Commission was established for disposing state owned enterprises. The mission statement of Privatization Commission of Pakistan clearly shows the objectives of privatization. Privatization is envisaged to foster competition, ensuring greater capital investment, competitiveness, and modernization, resulting in enhancement of employment and provision of improved quality of products and services to the consumers and reduction in the fiscal burden. (PC Annual report, 1998) 19

Government of Pakistan has divested two banks in 1991 namely Muslim Commercial Bank and Allied Bank of Pakistan Limited. Privatization of banks was aimed to strengthen the sources of governance and financial discipline and minimize the political interference through an amendment in law. In the light of mission statement of Privatization Commission, I have selected these two banks as a case study to evaluate, whether the objective of privatization was achieved or not. I have examined the efficiency, impact on economy, employees welfare and products and services of these two banks for pre- and post privatization period. I have also studied some legal aspects of the privatization process in Pakistan.

1.9.1. Muslim Commercial Bank This was the first bank in the public sector to be privatized. On April 6, 1991, 26 percent shares of MCB were sold to the National Group at a price of Rs56 per share for an amount of Rs838.8 million on an as is where is basis. As a result of this transaction, the Federal Government suspended the application of the provisions of the Banks (Nationalization) Act, 1974 except for the section 5(6)(a) to the Bank for a period of six months. As part of the Sale Agreement between the Government of Pakistan and the National Group, a further 25 percent of shares were offered for subscription to the public on February 19, 1992. Consequent upon completion of divestment of 51 percent shares of MCB, the application of Banks (Nationalization) Act, 1974, ceased on MCB. Later National Group purchased additional 24 percent shares of MCB on December 31, 1992, at a price of Rs56.15 per share thereby increasing their shareholding to 50 percent of the total shares of the bank. Further shares of the bank were sold in January 2001, November 2001 and October 2002, for proceeds of Rs1.3 billion.

20

Figure.1.5

Source: Policy Consideration Before Bank Privatization-Country Experience by Dr. Ishrat Hussain Governor State Bank of Pakistan

1.9.2. Allied Bank Limited The Allied Bank was the second bank in the public sector to be privatized. Unlike MCB, which was sold to a strategic buyer, ABL was privatized through an Employee Stock Ownership Plan (ESOP). On September 9, 1991, 26 percent shares were sold to the Allied Management Group, which represented the employees of ABL at a price of Rs70 per share. On August 23, 1993, another 25 percent shares were sold to AMG at a price of Rs70 per share. This resulted in transfer of ownership from the Government of Pakistan to AMG and the application of Banks Nationalization Act 1974 ceased to be applicable. In 1999, it transpired that one of ABLs major defaulters had purchased about 35-40 % of ABL shares from employees. Subsequently in July 1999, the State Bank imposed restrictions on the transfer of shares from employees to non-employees except with prior approval from the SBP. On August 3, 2001, the SBP removed the Chairman and three Directors from the Board of ABL, who were also employees of ABL, as they were found

21

to be working against the interests of ABL and its depositors and appointed a new Board to look after the affairs of the bank. In the backdrop of this situation, the State Bank proposed to the Privatization Commission to exclude the name of ABL from the list of privatization and transfer the strategic sale of ABL to the State Bank of Pakistan. Consequently, ABL was excluded from the list of privatization and the strategic sale of the remaining 49 percent government share was transferred to the SBP in April 2003. The State Bank initiated the process of reconstruction of the bank and transfer of its ownership to one of the existing financial institutions in the private sector that will acquire strategic shareholding. In February 2004, 6 parties were pre qualified by the State Bank for bidding for the 49 percent shares of ABL.

Figure 1.6

22

Figure 1.7

Figure 1.8

Source: Policy Consideration Before Bank Privatization-Country Experience by Dr. Ishrat Hussain
Governor State Bank of Pakistan

23

1.9.3. Overview The pace of banking development in Pakistan has perhaps very few parallels in the world. Starting from virtual scratch in 1947, the country today possesses a full range of banking and financial institutions to cope with the multifarious needs of growing economy. (.Meenai. S.A)

1.9.4. Historical Background Historical background of the Pakistan banks may be divided in tree stages.

Since 1947 to 1974 ----Pre Nationalization Stage Since 1974 to 1991----- Nationalization Stage. Since 1991 onward---- Privatization Stage.

1.9.4.1: Pre Nationalization Stage The partition plan was announced on 3rd June 1947; and the 15 of August were fixed as the date on which the independence was to take effect. In March 1947; there were 3496 offices of Indian scheduled banks in which 487 offices were in the area constituted Pakistan. The Reserve Bank of India being the central banking authority in India, it was decided that in the interest of smooth transition it should continue to function in the new dominion of Pakistan until 30th September, 1948.the decision was taken to help Pakistan facing administrative and technical difficulties involved in immediately establishment and operation of central bank. The events immediately after independence seriously strained the political relations of the two dominions, and point was reached when it become evident that with out control on its currency and banking the newly established state of Pakistan would remain exposed to grave dangers. The banking services in Pakistan were seriously impaired and drastically curtailed. The banks that had their registered offices in Pakistan transferred them to 24

India. In an effort to bring about collapse of the new state by pursuing a deliberate policy of withdrawal, the Indian bank offices closed quickly. (Hussain Zahid 1955). Those banks, which stayed, operated only in name pending the winding up of their business. Therefore, the number of scheduled bank offices thus declined from 487 before independence to only 195 by 30th June 1948. Pakistan banking system at that time consisted of 19 non-Indian foreign banks small branches whose policies and operations were controlled from their head offices. These banks were not interested in the economic fortune of newly born state. There were just two Pakistani banks the Habib Bank that has transferred his office from Bombay and Australasia Bank, which had been functioning in Pakistan territories prior to June 1947. Government of Pakistan has provided different facilities to restore their confidence. Finally under banking companies Pakistan Ordinance 1947, a moratorium of three months was offered to any bank facing difficulty on account of the panicky withdrawal of deposits. The situation, however, showed no sign of improvement. The Imperial Bank of India, which, as the agent of the Reserve Bank of India had been designated as the agent to the Government of Pakistan for their business, closed down most of its offices. The few offices, which remained were unable even to discharge the routine function of accepting deposits and cashing cheques (Ibid). Moreover, the bank declined to purchase even token amounts of Governments of Pakistan securities on the plea that these securities were not marketable (Baqai. M.1953). The reserve bank of India refused to assist the Pakistan Government with an advance against ad hoc securities to enable them to make essential disbursements such as salaries and other obligations (Hussain .Zahid. 1955). Its conditions for granting accommodation to the Government of Pakistan were extremely stringent. Further to appreciate its difficulties, it withheld Pakistans share of Rs. 75 crore in cash balance held by the undivided Indian Government at the time of partition (Ibid). On the basis of above mentioned problems Government of Pakistan felt to set up own central bank and take control of banking in its own hands. A committee was immediately set up to formulate a scheme of central banking legislation for Pakistan. The committee was of view due to shortage of trained personnel it would be difficult to run central bank properly so it was recommended that currency board should be 25

established till to cover the trained personnel to operate the state bank of the country. However, Government of Pakistan took bold step about setting up of full-fledged central banking authority. Among other factors, which led to this decision, there was the fact that banking facilities in the country had been totally disrupted and there was urgent need for their rehabilitation, which a central bank alone could meet. A Banking Companies (Control) Act was passed in December 1948, specifically empowering the State Bank to control the operation of banking companies in Pakistan. An equally urgent task to which the new central bank had to address itself was the creation of the national banking system. The state bank recommended to government that anew banking institution be set up to serve as an agent of the state bank. A scheme was prepared for the setting up of the National Bank of Pakistan and bank was set up under an ordinance in November 1949. Governor of State Bank was appointed to head the Board of Directors in 1950. Under the fostering care of State Bank and with the support of the Government, the new institution developed rapidly. In 1952 the national bank became sufficiently strong to take over the agency function from the Imperial Bank of India. The State Bank of Pakistan Ordinance took form of an act of legislature on 18th April 1956. A major step taken in 1962 was the enactment of a comprehensive banking law to ensure development of banking in the country on sound lines and safe guard the interests of the depositors. Following the loss of East Pakistan, and the assumption of office of new government in 1971, bank reforms were introduced in may 1972. In 1974 the Government Nationalized the State Bank and all commercial Banks incorporated in or out side Pakistan and were brought under Government ownership.

1.9.4.2. Nationalization Stage The Peoples Party Government led by late Mr. Zulfiqar Ali Bhutto nationalized fourteen commercial banks and the State Bank of Pakistan under the Nationalization Act 1974 on January 1, 1974. Up to December 31,1973 there were fourteen Pakistani commercial banks which were functioning all over the country and some foreign 26

countries through the network of branches. These were joint stock banking companies incorporated under the Banking Company Act. The financially weaker banks were merged with the banks, which were on strong footings. As result of merger of banks, the following five major banking companies were formed. (Saddiqi, H. Asrar. 1978) Habib Bank Limited United Bank Limited National Bank Of Pakistan Muslim Commercial Bank Limited Allied Bank Limited.

Figure1.9

Source: Policy Consideration Before Bank Privatization-Country Experience by Dr. Ishrat Hussain
Governor State Bank of Pakistan

The objective of the nationalization was to stop the accumulation of wealth in few hands. Since the banks have been nationalized, the merits and demerits of the public ownership of banks continue to be a subject of controversary. The main considerations behind the nationalization of banks were as under:

27

Concentration

of banks credit in few hands.

Fair distribution of credit. Financing of agriculture. Credit needs of small industrialist. Mobilization of resources. Service motive. Improvement in efficiency. Holding of the price Line. Increase in the rate of economic growth. Abolition of malpractice. Security to the depositors. (Nasir. M. Saeed 1979)

With the passage of time it was proved that the decision of nationalization banks was wrong. The area that was severely criticized was the falling standard of banking services and political misuse of credit policy, management and utilization of banks resources for stabilization of governments. So in 1990 it was decided to divest the nationalized banks to create competition and improve the efficiency of banking sector in Pakistan.

1.9.4.3: Post Privatization Stage Privatization activity has grown in the past ten years, both in terms of number and value of transactions. In the 1980s there were only a few transactions on average per year, but by the late 1990s the annual average rose to about 500. Between 1990 and 1999, total global proceeds amounted to US$850 billion, growing from $30 billion in 1990 to $145 billion in 1999. Developed countries account for the bulk of the proceeds, mainly from public offerings of large firms in countries of the European Union (Mahboobi, 2000). See Figure 1.5 for details of global privatization proceeds since 1990-1999(US $ in

28

Billions) and Figure 1.6 for privatization proceeds by region, 1990-2000 (US $ in Billions).
Figure 1.10: Global Privatization Proceeds (US$ billion)

150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997
Total

1998

1999

Non-OECD Countries
Source: Mahboobi, 2000.

OECD Countries

Figure 1.11 Privatization Proceeds by Region,1990-2000 (US$billion) 4%

3%

14%

3%
South Asia

21%
Middle East and North Africa Eastern Europe and Central Asia Latin America and the Caribbean East Asia and

55%

Source: World Bank (2001b) Large segments of the global banking system have been transferred from state to private hands over two decades, and much more is poised to be sold in the near future. Pakistan has to follow the global changes, decided to transfer their public sector banks to move from state to market economy. The reasons for transfer from state to 29

market economy, two factors stand out as especially important. First, compelling and overwhelming evidence began to accumulate showing that state ownership was not as working as planned. The second factor was a dawning realization that this really matteredthat financial system development promoted economic growth. Pakistan has already divested two bank namely Muslim commercial Bank and Allied Bank of Pakistan and is in the process to divest other state owned banks. Rational for privatization are different in different countries. Some are common for both developed and developing countries while some are special for developing countries facing some special problems like fiscal deficit and instructions of world donors. Pakistan was facing a problem of huge fiscal deficit. Fiscal deficit reached a high of 8.5 percent of GDP in 1987-88. Loss making public sector enterprises were a burden on the national exchequer. To reduce the fiscal deficit of the country and to obey the order of the lenders it was decided to privatize the public sector banks in Pakistan.

Figure 1.12

30

Common Reasons for launching bank privatization not only in Pakistan but worldwide were: SOE manager will have weaker and/or more adverse incentives than managers of privately owned firms, and thus will be less diligent in maximizing revenues and especially minimizing cost. State enterprise will be subject to less intense monitoring by owners, both because of collective action problemspotential monitors have less incentives to careful observe managerial performance because they bear all the cost of doing so but reap only a fraction of the rewardsand because there are few effective methods of effectively disciplining SOE managers in the event that sub-par performance is detected. The politicians who oversee SOE operations cannot credibly commit to bankrupting poorly performing SOEs, or even to withholding additional subsidized funding, so state enterprises inevitably face soft budget constraints. It bears repeating that these criticisms of state ownership are valid even if one grants that the politicians who create and supervise public enterprises have benevolent intentions. The final and in many ways most compelling, critique of state ownership is that SOEs will be inefficient by design, since they are created specifically so that politicians can use them to benefit their own supporters at the expense of another group in society. Numerous researchers including Vickers and Yarrow (1988,1991), Stiglitz (1994), Nellis (1994) and Boyko, Shleifer and Vishny, (1996a,b), Shleifer (1998), Sappington and Sidak (1999) and Shirley and Walsh (2000)note that state enterprises can be remarkably effective tools of redistributive politics. Since state firms answer to political masters, rather than the market, wide divergences from profit-maximizing behavior are not only 31

possible, they are in fact desired. Even in fully competitive markets, Shleifer and Vishny (1994) show that SOEs will be inefficient because politician force them to pursue non-economic objectives, such as maintaining excess employment, building factories in politically (but not economically) desirable locations and pricing out puts at below market clearing prices. The case of Mehran Bank and Gadoon industrial state is best example of political interference in state owned enterprises in Pakistan.

Table: 1.3 Summary Information on Banking Privatizations, 1980-2003 in OECD and Developing Countries.
Variables All countries Number of countries 51 OECD Countries 33 Non-OECD Countries 18

Number of Transactions

270

156

114

Average (median) size per Transaction in US$ Millions

482.66 (44)

247 (85)

710 (376)

Average (median) percent of Enterprise sold in transaction

59.1 (55.0)

46.3 (40.0)

49.6 (41.7)

Percent of transactions through Public share offering

37.9

43.6

50.1

Total value of all transactions in US$ millions

1161558

38473

80897

Source: Boehmer, Nash and Netter (2001) 32

Table: 1.4 Summary information on banking privatizations, classified by Offering Type, 1985-2003

Methods of sale

Number transactions

of

Value (US$ Million)

Share issue privatization

144

76187.85

Asset sale

139

66714.74

Total

283

142902.59

Source: Megginson (2003)

1.10. Objective of Privatization of Banks in Pakistan To undertake restructuring of financially distressed banks. Reduction in fiscal deficit To foster competition Broad basing of equity capital To improve saving mobilization and enhance the efficiency of credit allocation. To enhance the soundness of the banking system through an improved regulatory and supervisory framework. To develop money and capital markets. To minimize the ratio of non-performing loans.

33

The objectives of privatization of banks can be achieved if the following principles are adopted for privatization process in Pakistan: Privatization should be viewed as good governance reforms. Privatization program must be an integral part of a countrys economic policy. Privatization program must include a strong institutional and regulatory framework. The environment must be competitive, regulated and transparent. Deregulation of the financial system should precede privatization. Regulation is required only where restructuring unable to ensure a fully competitive industry. Rehabilitation prior to privatization should be avoided. Privatization programs should be accompanied by extensive public awareness campaigns. Privatization programs should be complemented by comprehensive social welfare programs.

1.11 Scope of the Study The study relates to two banks (MCB and ABL) previously working as a public sector banks and later on privatized. The reason for selection of these two bank was availability of data for both pre and post privatization period. In some areas banking sector as whole is taken as per requirement of the study. The maximum portion of the study is based on secondary data (published data) while in some portion primary data is used. The study covers 30 customers of each bank in three districts representing 30% of entire population, which are mentioned in the methodology. The sample consisted 10 % of higher educated customers, 10% businessman and 10% of common customers. The sample has also categorized on the nature of the area, 70% of customers were located in the urban area, 30 % were in semi urban areas of these three district. 34

1.12. Objectives of the Study

Bank privatizations are among the biggest challenges facing many governments around the world. Government of Pakistan is facing the same challenge. The claim of the government about privatization of banks is to establish a more efficient and market-oriented economy, reducing the influence of the state on credit allocation, appointment and managerial policies of the banking sector. The study at hand surveyed the efficiency after privatization of two banks selected as a case study, its impact on economy, impact on employees and customers welfare. Other issues and questions that are addressed in this study are legal framework for privatization of banks in Pakistan. Main Objectives of the study include: First, most assessments of privatization have looked at financial and operational performance at the bank level, comparing efficiency and profitability before and after privatization, changes in performance, investments, capacity utilization, and the like. The study provides ample evidence that, when done right, privatization improves performance in many different settings in many different ways. Second, there is a limited but growing body of work about the fiscal and macroeconomic effects of privatization showing positive fiscal benefits and a high correlation between privatization and growth. Third, growing analysis of the employment and broader labor market impacts shows that privatization does not always lead to unemployment, but that the outcomes are mixed, reflecting country and industry differences. When evaluated against the counterfactual, privatization has often led to employment increases at both the enterprise and industry level. 35

Fourth, the broader welfare and economic consequences of privatization of banks are not as widely studied, though the few rigorous evaluations show that privatization of banks has done well, and that the customers welfare effects when compared to realistic counterfactuals have been positive, often substantially so. Fifth, the legal effects of privatization of banks on the banking law of the country are the least studied aspects of privatizationthough considerable work on these questions is now in progress. 1.13 Methodology The proposed research is intended to survey the process of privatization of banks in Pakistan and assess its impact on the efficiency of two banks selected as a case study. The central issue I have addressed is the impact of privatization that has taken place so far on profitability and performance of privatized banks. Going beyond this, I attempted to understand what explains the impact of privatization on performance. The study also addressed the impact of privatization of banks on economy, employment, customers and regulation.

The research out put will comprise the following. 1. Introduction of the study 2. A survey of the literature on privatization banks, particularly with respect to less developed countries. 3. Impact of privatization on firm performance 4. A review of the role of the banking sector in the Pakistan economy 5. Explanation for the impact of privatization of banks on employment 6. Customer views about privatization of banks in selected districts for the study 7.Assessment of mechanisms of corporate governance in Pakistan 8. Conclusion and summary of the study

36

Methodology is a set of procedures that enables researcher to observe the deduced theoretical relationship between different variables qualitatively or quantitatively. Methodology in this research work hinges upon two lines, one qualitative and the other quantitative. The qualitative aspect is based on the theoretical background of privatization of banks, reasons and causes of privatization, targets and objectives as well as the methods and techniques of privatization of banks used in different countries and their results. I have also used semi structure interview to collect information about customers views and opinions of both banks selected as a case study for both periods (pre- and post privatization periods). Questions prepared and asked during interview were based on performance, services and products of the banks before and after privatization. In qualitative aspect we have also analyzed privatization of banks and its impact on employees on the basis of numbers of employees and branches. Legal impact is also touched in this aspect. In case of quantitative, DEA, theoretical framework, ratios, regression, correlation, coefficient determination and statistics z test have been calculated.

1: Published data (Secondary Data) is used to analyze the performance with following financial tools and techniques. To investigate the efficiency of two banks Muslim Commercial Bank of Pakistan Limited (MCB) and Allied Bank of Pakistan Limited (ABL) because the data on these two banks was available for both pre- and post privatization period. A researcher has used published date taken from annual reports of both banks for analysis. A researcher has also analyzed the banking sector of Pakistan as a whole selected banks specifically. I have used Data Envelope Approach, theoretical 37

framework and financial ratios, used by Sam Q. Ziorkklui et al Howard University (2003). They have developed a comprehensive index of banking efficiency and performance that is expressed as the word TARCSIMEL, used for analyzing efficiency and general performance of banking institution in Ghana.

I have also calculated the different ratios for three banks MCB, ABL, and UBL as a cooperative study between public and private sector banks in Pakistan. Financial ratios are calculated for five years pre- and post privatization period of UBL, ABL, and MCB (19986 to 1990 and 1996 to 2001). The analysis of financial statements are consisted the study of relationships and trends to determine whether or not the financial position and financial progress of the banks are satisfactory or unsatisfactory.

Analytical methods and techniques which were used in financial statements, include the following Comparative balance sheets, income statements, and other statements showing: -

Absolute data (In rupees amounts) Increase and decrease in absolute data (in rupees amounts.) Increase and decrease in absolute data (percentages) Comparison expressed in ratios. Percentages of totals 38

2:Overall cost and benefit analysis

I have evaluated the privatization of banks and its impact on economy using the data of schedule banks at country level as well as for two banks. I have used different methodologies to assess the relationship between banks and economic growth. Work of assessment of connection between banking sector development and sources of economic growth are available in the economic literature. (See king and Levine 1993b; and Levine and Zerovs 1998). I have selected the

deposits, credits and advances, investment and GNP as sources of economic growth. We have developed two hypotheses and then the correlation and time series between the sub hypotheses were calculated to see significance of correlation/regression. I have collected the data about the numbers of employees, numbers of branches and total operating expenses of two banks for pre-and post privatization period. I have measured the impact of privatization on employees quantitatively (numbers of workers unemployed, numbers of new jobs created etc.) 3: Primary data is used in research To evaluate the privatization of the banks and its impact on customers, I have carried a semi structure interview to collect data about customers views about privatization of banks in Pakistan. A series of questions were designed to examine the customers satisfaction with bank services, confidence on banking sector in Pakistan, use and 39

knowledge of banks new products etc. etc. The sample selection of bank account holders was based on random selection of bank account holders at bank premises during the normal business hours of the bank.

The procedure used for collection of primary data

Thirty accounts holders of the selected banks were used as sample in the three districts of NWFP where as the population was all accounts holders of MCB and ABL. Semi structured interview schedule was prepared to collect data of customers views about these two banks for pre- and post privatization period. District selected, as sample areas were Peshawar, Mardan and D.I Khan.

The reason for selection of three district of NWFP was: -

The three districts were easily accessible. Customers of both types were available, i.e. business and non-business accounts holders. 4: Legal and political effects of privatization of banks were analyzed. Table 1.5

40

Research Paradigm
Privatization of Banking Sector in Pakistan A Case Study of MCB and ABL

Overall Introduction of the Study

Economic Impact Efficiency

Impact on Eco. Development t Impact

Customer Impact

Legal Impact

Summary & Conclusion

Introduction Introduction Introduction Introduction Secondary / Published Data is used Secondary / Published Data is Used Hypothesis are developed Secondary / Published Data is Used Primary Data is used Findings Recommendat Introduction Secondary Data is Conclusion

Conclusion

DPA/Theoretical Framework / Ratio Analysis Statistical Methods are used

Hypothesis are developed

Semi Structured Interviews

Points for further Research

Findings

Findings Findings
Findings

Conclusion Conclusion Conclusion Conclusion

41

CHAPTER: 2 LITRATURE REVIEW 2.1 Introduction

Financial sector reforms and liberalization was set in motion in mid-eighties and its pace was accelerated in 1990 when the economy suffered from a precariously low foreign exchange reserve, burgeoning imbalance on the external account, declining industrial production, galloping inflation and a raising fiscal deficit. Financial sector in the next millennium reforms, being integrated process, including deregulation of industry, liberalization of trade, exchange rate and tax policies, partial/complete disinvestments of government holding in public sector companies and financial sector reforms. The problems of Pakistans banking sector were rooted in a failure of governance and lack of financial discipline owing to undo political interference in the financial intermediation process, especially in the NCBs and DFIs. The NCBs and DFIs were the major sources of bad loans, accounting for 90% of bad loans in the entire system, and were the main loss makers. The objective of the banking sector restructuring and privatization is to achieve competitive banking system, strong regulatory framework and an effective count banking system.

2.2 Privatization of Banks and its Impact on Efficiency

Within the banking sector, efficiency is the core concern of both academics and bank officials. A number of studies have sought to measure the efficiency of financial institutions, to identify the factors that contribute to efficiency of financial system, and to recommend the ways to attain the peer group efficiency levels (Berg, (1993); Leaven, (1999); Berger and Mester, (1997); Miller and Noulas, (1996). Abid A. Burki and Ghulam Shabir Khan Niazi (2003) Efficiency of financial service firms and the strategy being followed by them is largely reflected through the information condensed in their balance sheets and profit and loss 42

accounts. Oral and Yolalan (1990) have discussed the critical issues in efficiency of service organizations like banks using the DEA approach. They have studied the efficiency of 20 banks in Turkey. They used number of bank transactions as output of banks while labour, number of accounts and credit applications were considered to be the inputs. Megginson, Nash, and Van randenborgh (1994) compare three years average postprivatization financial and operating performance ratios to the three years pre-privation value for 61 firms from 18 countries and 32 industries from 1961- 1989. Tests significance of median changes in post versus pre-privatization period. They found that economically and statistically post privatization increases in output, operating efficiency, and profitability. Boubarki and Cosset (1998) compare three years average post privatization financial and operating performance ratios to the three years preprivatization value for 79 companies from 21 developing countries giving the same result that post privatization operating efficiency and profitability is improved. D Souza and megginson (1999) carried a study 78 companies 10 from developing and 15 from developed countries over the period of 1990-94. The findings of the study are showing improvement in the post-privatization period. Verbrugge, megginson and lee (1999) study 65 banks fully or partially privatized from 1981-to 1996. Then compare pre and post privatization performance for 32 banks in OECD countries and 5 in developing countries. The result of the study is showing moderate performance improvements. Beck, Cull and Jerome (2003). Examine the effect of privatization on performance using an unbalanced panel of 69 banks with annual data for the period of 1990-2001. Finding of the study is showing positive impact on efficiency due to privatization. Chen and Yeh (1998), where operating efficiency of 33 banks in Taiwan is measured. They have used the DEA approach to measure such efficiency using the factors like loan services, portfolio investment, interest income and non- interest income as banking output while factors like staff employed, bank assets, number of bank branches, operating costs and deposits as inputs. 43

Sathye (2001) provides an extensive account of x-efficiency analysis of 29 Australian Banks. He has used two outputs and three inputs with their respective prices as well in his quest for x-efficiency analysis. The outputs included loans and demand deposits while inputs represented labour, capital and loan able funds. Per capita expenditure on employees, per capita expenditure on premises and fixed assets and average interest expense on deposits were treated as input prices. Mukherjee, et al. (2002) has investigated the relationship between strategic groups and firm performance in terms of efficiency for 68 Indian Banks. They have used the financial variables like net profits, deposits, advances, non- interest income and interest spread as output of banks. Inputs include net worth, borrowing of the banks, operating expenses, number of employees and number of bank branches. Jemric and Vujcic (2002) have used the DEA approach to estimate the efficiency of 48 Croatian commercial banks. They have used three inputs, which include fixed assets and software, number of employees and deposits. The two outputs used were total loans extended and short-term securities. These empirical findings suggest a healthy competitive financial market pave the way for efficient market participants that lead to overall efficiency of the system and improve performance and productivity. Some empirical tests have been carried out to measure effects of liberalization and deregulation of financial institutions on efficiency and productivity of banking sector. The results of these studies were across the countries. Berger, Hunter and timme (1993) and Kaparakis, Miller and Noulas (1994). After liberalization of seventies in United States, many studies have sought to measure banking efficiency, Miller and Noulas (1996); Kaparakis, Miller and Noulas (1994); and Elyasiani and Mehdian (1990); Humphrey and pulley (1997); Berger and Humphrey (1991) Drake (2000). In Turkish Banking industry, after financial liberalization, efficiency regress has been reported. Moreover private and foreign owned banks did not perform better than the state owned banks, Denizer, Dinc and Tarmcilar (2000). In Tunisian banking sector after liberalization no significant efficiency improvement have been observed but private owned banks were efficient than the public sector banks, Cook, Hababon and Roberts 44

(2001). In China, the efficiency gains have been observed, Bhattacharyya, Bhattacharyya and Kubbhakar (1997). Recently Hardy and Patti, (2001) came up with the findings that some efficiency improvements have been recorded in case of Pakistan.

2.3 Privatization of Banks and its Impact on Economic Growth

It has been long debated in economic literature whether financial markets play a significant role in the economic growth and development. Gertler (1988); and Levine (1997). Findings of some recent empirical literature show that well functioning financial system plays an instrumental role in economic growth, and causality runs from finance to growth, for cross country evidence see king and Levine (1993, 1993a); Levine and Zervos (1998), Levine, Loayza and Beck (1999); Beck, Levine and Loayza (1999). LaPorta, Lopez-deSilanes,Shleifer(2000a) Using data from 92 countries, examines whether government ownership of banks impacts level of financial system development, rate of economic growth, and growth rate of productivity. Find that government ownership is extensive, especially in poorest countries, that these holding retard financial system development, and restrict economic growth rates, mostly due to impact on productivity. There is now little doubt that financial sector in general, and banking in particular, plays an important role in fostering the economic development of a nation. Developed banking system is indispensable for modern commerce and modern commerce is necessary for economic development. Rajan and Zingales (1998) Important recent papers in this literature are Demirguc-Kunt and Maksimovic (1996,1998), Levine (1997), Demirguc-Kunt and huizinga (1998), Wurgler (2000), Cetorelli and Gambera (2001) and Beck,Demirguc-Kunt and Levine (2003). Related papers stress the importance of the creating the proper legal and regulatory framework for encouraging the development of efficient, liquid banking and capital markets. This literature is largely 45

encompassed in a series of articles by La Porta and Lopez-de-Silanes (1999) and La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997,1998,2002). The basic themes that emerge from these research streams are that an efficient financial system is vital. Economic reform/privatization in broad sense can be defined as the transformation of the economic system as a result of actions of the government (Bruno, 1989), which alter the institutions that regulate economic interactions and behavior (North, 1990, Scott, 1995). Economic reforms have in general taken in three forms depending on the initial condition of the country. Movement from high state intervention to low state intervention in the economy, which advanced capitalist countries such as the UK and Spain underwent in the 1980s and 1990s (Baily, 1986, Peltzman, 1989, Winston, 1993,1998). Transformation of communist based or command-based economic systems towards capitalist-based or market based ones as the case of former Soviet Block (Aslunde, Boone, and Johnson, 1996; Blanchard, 1997; Brada, 1996, Peng, 2000; Sachs, 1996; Svenjar, 2002) Replacement of import-substitution policies with more open market models of economic models of economic development, as took place in much of Latin America and South Asia during 1990s. (Bruton, 1998; Dornbusch, 1992; Edwards 1993; Reinhardt and Peres, 2000; Sachs and Warner, 1995). In these all three types of reforms the basic objective is to reduce the government intervention in the economy. Three forms of reforms were taken for reduction in tendency of government intervention in economy were: Privatization (Vickers & 1988; Zahra et al., 2000) Deregulation (Winston, 1993, 1998). Liberalization (Cooper, 1982; Norman & Thisse, 1996) 46

2.4 Privatization of Banks and its Impact on Employees

Despite the extent of privatization worldwide, little attention has yet been paid in policy and the academic literature to its impact on labor (Beck, Johanson and Fretwell 1995; Hess 1994; Svejnar and Terrel 1991; Van der Hoeven and Sziracki 1997). In India Pakistan and Turkey, public enterprises were estimated to be overstaffed by nearly 35% in the early 1990.(Banerji and sabot, 1994). Overstaffing is most pervasive in enterprises that have operated monopolies with heavy government subsidies and other form of protection. Galal, Jones, Tandon,and Vogelsang, (1994) compare actual post-privatization performance of 12 large firms mostly airlines regulated utilities in Britain,Chile, Malaysia and maxico. Find no case where workers were workers were made worse off, and three where workers were better off. Loretta de Luca (ed.): International Labor Organization, Geneva, November, (1997) giving details of privatization and restructuring experience of infrastructure utilities in Africa, the Americas, Asia and Europe, examining the impact of privatization and restructuring on employment levels and employment conditions, and identifying factors that facilitate successful reform. Sunita Kikeri, World Bank Technical Paper No. 396. World Bank, Washington, D.C., February (1998) in her paper examining the effects of privatization on labor, and analyzing the mechanisms that government can use to minimize the political and social costs of labor restructuring in privatization. Robin Johnson, E-brief 112. Reason Public Policy Institute, Los Angeles, March (2001) In his paper examines evidence from the United States that privatization does not necessarily require massive public-sector layoffs, citing several studies where privatization has resulted in few, if any, layoffs, and suggesting that public employees can actually benefit in the long term from private-sector management.

47

Gopal Joshi (ed) International Labour Organization, Geneva, (2000) using five countries, (Bangladesh, India, Nepal, Pakistan and Sri Lanka) as examples, this paper looks at how the rationale for privatization and preparations for privatization affect social costs and worker dislocation arguing that the success of privatization depends on the effectiveness of mechanisms for social dialogue between workers and employers. Patrick Belser and Martin Rama Policy Research Working Paper 2599. World Bank, Development Research Group, Washington, D.C., April (2001) are in a view that privatizing or restructuring state-owned enterprises may lead to mass layoffs, but the number of redundant workers is usually unknown beforehand. This paper estimates labor redundancy by comparing employment levels across enterprises with different degrees of state ownership.

2.5 Privatization of Banks and its Impact on Customers

The focus of most studies is efficiency and profitability of the privatized business and, to lesser extent, the quality of the services it delivers (Hodge, 1996). No direct work is done in this area except the Sam Q. Ziorkui etal, Howard University Discussion paper No 81 February (2001). He interviewed the customers about changes in banking services and products after privatization of banks in Ghana.

2.6 Privatization Bank and Regulation

Government has changed the legal environment with change in banking environment in Pakistan.

48

Chapter 3 The Impact of Privatization on Efficiency of Banks

3.1. Introduction The emergence of fast paced dynamic environment in business world in general and financial services sector in particular, has highlighted the significance of competition and efficiency. The need for deregulation has become a touchstone of success in fostering both competition and efficiency especially in the economies, which are exposed to structural reforms. In addition to that, intense competition both among domestic and foreign banks, rapid speed of innovations and introduction of new financial instruments, changing consumers demands and desire for product augmentation have changed the way a bank conducts business and services its customers. Larger the degree of competition, it is perceived that the firms would become more efficient. However, when the structure of an industry is product of the government regulations, the degree of competition is impaired markedly implying that the efficiency suffers negatively. (Hanif .M. Akhtar, 2002) Analysis of financial institutions in developing countries in the light of changes taking place in their structures and regulatory environment has immense value for regulators, policy makers, managers and investors. In particular, how these policy reforms affect efficiency of banks in developing countries has a wider appeal. Over the past decade a number of developing countries have embarked on a reform path and have witnessed improvements in their financial systems while others are contemplating on doing so. But there is no reason to expect that impact of reforms on performance would be positive and uniform across countries. In particular, it is not obvious how the reform process is influenced if economic growth environment in the country is not conducive. (Burki .A.Abid et al, 2003) In fact, there are many previous studies discussing the efficiency and economies of scale in the banking industry. For example, Berger, Leusner and Mingo (1997) investigate the 49

branch efficiency of U.S. large commercial banks from 1989 to 1991, by separately estimating frontier-flexible and translog cost functions for several years. Their evidence shows that banks are likely to over-branch twice as many as the possible cost minimizing level, and technical inefficiency, namely X-inefficiency, amounts to about 20% of their operation costs. Berger and Hannan (1998) also in part examine the U.S. bank efficiency, concluding that the efficiency cost (i.e. X-inefficiency) resulting from a lack of market discipline is much larger than the deadweight welfare loss due to misallocation by monopoly power. (Saunders, Scalise and Udell (1998) Battese, Heshmati and Hjalmarsson (1998) examine the efficiency of labor utilization in the Swedish banking industry, using the stochastic frontier analysis (SFA). Regressing the labor input on the outputs of financial services such as loans, guarantees, and deposits, and the quasi-fixed input such as branches, given one-sided stochastic inefficiency and idiosyncratic noise, they show that technical inefficiency of the banks in their use of labor is on the average 12% above the stochastic frontier. Further, the technical inefficiency increased immediately after the reform in the banking industry in the mid-1980s, and then has decreased due to the reform effect since 1991. Adams, Berger and Sickles (1999) perform stochastic panel distance frontier estimation, using the data of over 2500 U.S. banks over 10 years. The estimation of the Cobb-Douglas production functions indicate that technical efficiency scores normalized by the most efficient bank are quite small and range from 53.5% to 54.3%. (Atsushi Iimi, 2002) Banking industry acts as life-blood of modern trade and commerce acting as a bridge to provide a major source of financial intermediation. Thus, appraisal of its efficiency is vital in context of an efficient and competitive financial system. Study of x-efficiency is believed to be important in particular as Berger et al. (1993) found that x-inefficiencies account for around 20% or more of banking costs. Similarly, recent drive among banks towards downsizing, rightsizing and rationalization of banking costs also implicates for the assessment of x-efficiency analysis of banks. It becomes vital in Pakistani context, as there appears to be no study in literature on efficiency or x-efficiency analysis of banks in Pakistan. A great deal more work is needed on x-efficiency research in banking. Managerial efficiency, the concept of x-efficiency, appears to be a much more important 50

strategic and policy consideration (Molyneux et al., 1996.) Given the significance of xefficiency analysis, a study on Pakistan would be relevant and useful both to the executives of banks and policy makers in the economy. The concept of x-efficiency consists of two components: technical efficiency, which reflects the ability of a firm to obtain maximum output from a given set of inputs, and allocative efficiency, which indicates the ability of a firm to use the inputs in optimal proportions, given their respective prices. The study carried by Hanif. M. Akhtar, (2002)
calls for the improvement in efficiency of Pakistani banks through combined efforts of banking sector and the government to be at par with the best world practice. The results also support the on going process of privatization of public sector banks in Pakistan.

Burki.A.Abid et al, (2003) have investigated the impact of policy reforms on performance of commercial banks with a unique panel data from Pakistans banking sector over the period 1991 2000. For analytical purposes, banks were divided into three categories, namely: state-owned, private and foreign banks. They have applied the non-parametric DEA method to measure performance by cost efficiency and isolate the contribution to cost efficiency of allocative efficiency, technical efficiency, and pure technical efficiency and scale efficiency. They found that banking efficiency has varied over the study period from highest efficiency in 1991 to lowest efficiency in 1996. Investigating the source of mean cost inefficiency they found that allocative inefficiency contributes more than technical inefficiency. The highest levels of efficiency were achieved by foreign banks followed by private banks while state-owned banks achieved least cost efficiency. In second-stage regressions, they also used unbalanced panel data to find determinants of efficiency. The nature of sampling of banks and econometric tests indicated preference for the fixed effects model. They have regressed bank-specific efficiency measures for cost, allocative and technical efficiency on a set of control and policy variables to single out the impact of policy reforms on banking efficiency. Their results indicate that efficiency of banks cannot be differentiated on the basis of policy reform of privatization. Moreover, individual reforms promoting competition led to a decline in average performance of banks in post-reform period.

51

Realizing the inherent weaknesses of the financial structure that emerged after nationalization, Government of Pakistan initiated a broad based program of reforms in the financial sector. Objective of reforms were to create a level playing field for financial institutions and market for instilling competition, strengthening their governance and supervision, and adopting a market based-indirect system of monetary, exchange and credit management for better allocation of financial resources (Ishrat Husain: 2003 Washington DC). The public sector banks in Pakistan have performed poorly: Its aftertax profitability was much lower than that of the private sector. Its losses contribute to Pakistan's fiscal deficit. In order to improve the competition and the performance of these banks, Government of Pakistan has decided to privatize banks in public sector. It is aimed at making these institutions financially sound and forging their links firmly with real sector for promotion of savings, investment of growth. In contrast to its objective of stoppage of accumulation of wealth in few hands, the 1974 nationalization of banks by so called socialist government give birth to institutional corruption due to political influence, which in turn brought tremendous economic cost to the national exchequer and eroded organizational efficiency of the sector. The banking industry in Pakistan has experienced change in its ownership structure, level of competition, regulatory environment, instruments of market discipline and greater supervision since 1990. The start was taken from the privatization of two state owned banks Muslim Commercial Bank limited (MCB) and Allied Bank of Pakistan (ABL ltd) in 1991. One major issue facing by researchers and policy makers in developing countries is how to measure changes in bank efficiency associated with privatization/reform of banks. Various approaches to defining bank output and input in measuring bank efficiency have been adopted. In literature, there are two techniques to measure efficiency frontier. One is econometric based parametric frontier technique proposed by Aigner, et al. The other is mathematical non-parametric linear programming technique, called Data Envelopment Analysis (DEA). Burki. A. Abid, Ghulam shabir Khan Niazi and Dr. Muhammad Hanif Akhtar and syed Fawad Ali razvi for analysis of efficiency of banking sector in Pakistan after reform/privatization, used these two approaches. 52

This study investigates the efficiency of two banks Muslim Commercial Bank of Pakistan Limited (MCB) and Allied Bank of Pakistan Limited (ABL) because data on these two banks are available for both pre- and post privatization periods. (See appendix 3.1) I have used DEA approach, theoretical framework and financial ratios, used by Charnes et al(1978), to measure the relative efficiency and management performance in the presence of incomparable multiple inputs and outputs, and Sam Q. Ziorklui et al Howard University Sam Q.Ziorklui The Impact of Financial Reform on Bank Efficiency and Financial Deeping for Savings Mobilization In Ghana (2003) respectively. They have developed a comprehensive index of banking efficiency and performance that is expressed as the word TARCSIMEL used for efficiency and general performance of banking institutions in Ghana. I have also calculated the different ratios for three banks MCB, ABL and UBL as a comparative study between public and private sector banks. Besides, the application of regression techniques, it would be of interest to use alternative methods to see the performance level before and after the privatization in banking sector of Pakistan. Many researchers conducted efficiency measurement studies. Berger & Humphrey (1997) gives an account of such studies conducted in twenty-one countries. The traditional approach towards the efficiency measurement is Financial Ratio Analysis, but this has remained under attack since long because of relative importance of various types of input or output used in this method as has been pointed out by Chen & Yeh (1998). Besides, the method of Financial Ratio Analysis also ignores the value of management actions and investment decisions, which certainly affect future against the current performance. Mukerjee et al (2002) specifically pointed out the pitfalls of this method. So, other approaches were developed which include Stochastic Frontier Analysis, Free Disposal Hull, Thick Frontier and Distribution Free, all based on parametric ideas, while Data Envelopment Analysis (DEA) approach is a non-parametric based. The DEA approach was developed by Charnes et al (1978) to measure the relative efficiency and management performance in the presence of incomparable multiple inputs or outputs.

53

Study is divided in three parts: i) ii) iii) Data Envelopment Analysis Theoretical framework used by Sam Q. Ziorklui et al is to evaluate the efficiency of both banks. Financial ratios are calculated for both banks and compared with one public sector bank for evaluation of efficiency.

3.2 Part.1 Data Envelopment Analysis Hanif. M. Akhtar has used DEA for all banks of Pakistan including foreign banks. The results of the study are showing improvement in efficiency of private banks.

Source: Hanif M. Akhtar 2002, X-E efficiency analysis of commercial banks in Pakistan: A preliminary investigation. Pakistani banks are found to be utilizing the inputs (deposits and capital) and outputs (portfolio investment and loans & advances) in an optimum manner as the allocative efficiency appeared to be very high. The banks need to be consistent in this drive and share the benefit of increased efficiency with their clients. Private banks in Pakistan emerged as efficient on both fronts i.e. technical efficiency and 54

allocative efficiency, compared to their counterparts, the public and foreign banks. Result on the foreign banks is converse to expectat ions. An implication of the results might be the fact that most of the foreign banks in Pakistan often target a niche market that is corporate sector, which is more volatile and might make them inefficient. The high efficiency of private banks can be attributed to the fact that these banks have an extensive branch network, distribution power and a stable retail market size. Relatively lower efficiency of publicly owned banks alludes to the common perception that these banks are
less efficient due to lack of motivation and performance-based earnings among employees of these banks. This supports the latest drift towards denationalization and privatization of public sector banks in Pakistan. (Hanif. M. Akhtar, 2002) On the same pattern DEA analysis of two banks selected as a case study is calculated. Both are showing efficiency improvements.

Table No. 3.1

Summary Measures For Efficiency Calculations

1987 - 1991 MCB Before Privatization Inputs Assets (Rs.Millions) 171 Mean 34.2 Variance 9.665 Standard Deviation Estimated Standard Error of mean 6.95 9.665

Table No.3.2 1997-2001 MCB after Privatization Inputs Assets (Rs.Millions) 0.978 Mean 0.1956 Variance 0.0060 Standard Deviati Estimated Standa Error of mean 0.0778 0.00121

Efficiency = 9.665/0.00121 > 1 => MCBs relative efficiency better after privatization than before

55

Table No.3.3 1987 - 1990 ABL Before Privatization Inputs Assets (Rs.Millions) 72.9 Table No.3.4 1996-1999 ABL After Privatization Inputs Assets (Rs.Millions) 2.358 Mean 0.589 Variance 0.1182 Standard Deviati Estimated Standa Error of mean 0.34 0.03 Mean 18.225 Variance 15.3425 Standard Deviati Estimated Standa Error of mean 3.92 3.84

Efficiency = 3.84/0.03 > 1 => ABLs relative efficiency after privatization better than before (See appendix 3.1 for calculation) Part 11. The word TARCSIMEL is an acronym whose letters are defined as follows: T=transaction cost, A=asset quality, R=risk exposure, C=capital adequacy, S=spread between deposit and borrowing rate, I=intermediation proxies of savings and mobilization and credit allocation, M= Management competence, E=earning or profitability, L=liquidity

56

Figures.3.1
1:Operating cost as % of T/Income 2: Staff cost p/u of T/Income L cash as ratio of demand deposit 2:liquidity fund/T.deposit 3:Liquid funds/T.assets 3: Staff cost P/U of employee 4: Staff cost P/U of Op.cost

1:return on assets 2:return on equity Earning Profitab ility

Liquid ity

Transac tion t

1:Pro.of loan losses 2:write of loans losses

Asset quality
1:Default risk 2:Capital risk 3:interest risk 4:liquidity risk

1:income/assets 2:income/fixed assets

Mang. Compt

Banks Efficiency Model

Capitl Sprea d Rate
Adequa cy

Risk exposur

1:private loans/T.loans 2:public loans/T.loans 3:Govt.loans/T.loans 4:total credits/T.deposits

Inter. Proxe es

1:Demand deposit/Total deposits 2:quasi money/T.deposits 3:share.cont.as% T.assets

Source: Sam Q. Ziorklui et al (2003)

3.3. Efficiency Gains of Two Banks MCB and ABL 3.3.1. Transaction Cost One of the major objective of privatization of banking sector in Pakistan was to minimize transaction cost which will attract the customers to use banking facilities. Transaction cost can be reduced by training staff to be more productive in the delivery of bank services and the efficient management of bank operations. Before privatization maximum appointment in banking sector were on the basis of political affiliations and on 57

political approach. MA Islamyate, Urdu and political sciences degree holders were appointed as managers in the branches with out knowing the alpha bit of the banking operation. After privatization Institute of bankers launch a program of MBA banking and finance in different universities to produce future bankers. The efficient management may lead to lower cost for bank customers and depositors and an increase in savings mobilization. It will also increase the spread between the operating cost and revenue, which may lead to higher profit. The indicators to examine the transaction cost are: a: Operating cost as percentage of total income/revenue b: Staff cost per unit of total income/revenue c: Staff Cost per unit of employee d: Staff cost per unit of operating expense. The analysis was conducted for two periods pre- and post privatization of two banks, i.e. MCB and ABL. Table.3.5 Period Transaction Cost Average staff Bank Average cost % per operating cost as % unit of total income/ of total revenue income/ revenue MCB 92.8 26.7 ABL 96.4 28.6 24.68 24.47 Average staff cost % per employee Average staff cost per unit of operating cost

Before privatization 1987-91 After MCB 92.78 privatization ABL 99 1997-2001 Source: See appendix 3.2

63381.6 N.A 371906 N.A

28.71 N.A 28.25 N.A

The result shows little change in operating cost as percentage of total income. The operating cost as a percentage of total income of MCB was 92.8% before privatization while after privatization operating cost of MCB is 92.78% remain unchanged. The data shows that before privatization MCB was facing 92.8% cost for generation of revenue one Rupee. 58

Staff cost per unit of total income for pre-privatization period of MCB was 26.7% and after privatization it is 24.7% showing decrease of 2%. The operating cost as percentage of total income of ABL 96.4% before privatization, but after privatization it is 99%, mean increase of 2.6%. The third indicator of transaction cost which is staff cost per employee of MCB has increased for after privatization period. The fourth indicator of transaction cost per unit of operating cost of MCB is showing no notable changes. The reasons for Increase in staff cost per employ may be because of: Increase in number of private banks and competition for recruitment. Staff demand for higher wages Due to higher inflation rate; and Due to devaluation of the local currency

3.3.2. Asset Quality Improvement in the asset quality is the most basic ingredient to enhance the profitability and soundness of financial institutions. Advances and loans normally make up the largest portion of the assets of the banks and is important source of income. One of the major problems of the banks in Pakistan at the end of 1990 was the huge stock of Nonperforming loans (NPL), particularly of the public sector banks. Corporate and Industrial Restructuring Corporation was established in September 2000 to deal with the historical stuck-up portfolio of the banking sector. The study of the datas of two banks shows that the % of provision to total advances is decreasing from 1997 to 2000 but increase in 2001. The percentage of provision for MCB to total advances in 1997 6.2% and decreased to 5% in 2000 showing decrease 1.2% but increased 1.35% in 2001. As whole the stock of NPL 234.2 billion decreased by the end of 2002 from previous year for all schedule banks of Pakistan showing sign of improvement in the asset quality. (Pakistan: Financial Sector Assessment 2001-2002)

59

Figure 3.2 Percentage of Provision for MCB to T/Advances

2001 7.55

1997

6.2 5.95 1998

5.08 2000

5.68
1999

Figure 3.3 Provision as % of T/Advances for ABL

1999

5.07 6.72 1998

8.62

1997

The study also shows that write off % before privatization for both banks is high as compared to the post privatization period. See appendix .3.3

60

3.3.3. Risk Measurement The extent to which the banks manage the resources of depositors in order to generate income that pays interest to depositors and shareholders is associated with various uncertainties. Banking sector is facing different types of risks and needs proper management. The different types of risks are: Default Risk. Such as inability of the borrowers to pay loans. Capital Risk .The inadequacy of owner to contributed capital to cover losses on business transaction Liquidity risks. The inadequacy of funds availability to meet unexpected withdrawal by depositors. Interest risks. The potential of unexpected changes in interest rates to have adverse impacts on the revenue and expenses of the banks. Risk management is one of the important requirements for financial institutions. The default of one bank to another bank can create contagion risk, which can paralyze the whole economy. The term liquidity for the banks refers to their ability to quickly raise the cash at a reasonable cost. Adequate liquidity is important for the banks to pay creditors, meet unforeseen deposit runoffs, satisfy periodic changes in loan demand, and fund loan growth without making costly balance sheet adjustments. Absence of adequate liquidity may affect the profitability of an otherwise sound bank and in extreme case may lead to insolvency of a problem institution. Primarily, the liquidity risk arises due to mismatches in the maturity profile of assets and liabilities. Banks ability to bridge this gap at relatively lower cost mainly depends on the efficiency and liquidity position of inter-bank market and the stance of monetary policy. As whole banking sector of Pakistan is showing improvements in liquidity due to increase in deposits. The financial statements of the two banks selected as a case study are also showing improvements in liquidity after privatization. 61

Table 3.6 Risk Measurements

Bank %of Net interest income to Total Revenue MCB Year ABL Before privatization 1987 1988 1989 35.38 39.20 34.07 1986 1987 1988 37.32 38.20 37.50 1990 35.19 1989 32.10 1991 33.77 1990 33.33 1997 39.97 1997 07.71 After Privatization 1998 1999 2000 35.66 40.65 48.75 1998 1999 2000 12.69 04.59 N.A 2001 55.70 2001 N.A

Source: See appendix 3.4 3.3.4. Interest rate risk The change in interest rate can affect the earnings of the banks. The interest rate risk shows the extent to which changes in interest rates affect the valuation of the bank assets and liability cost. In a competitive banking environment where interest rates are determined by market forces, small change in interest rate will affect revenue and the cost of the funds. The data shows that interest rate risk of MCB has increased from 35.38 in 1987 to 55.70 in 2001, while interest rate risk of ABL decreased from 37.32 percent to 5 percent. The main reason of higher interest rate risk in Pakistan banking sector is because of higher spread rate. The spread rate has increased from2.4% in 1989-90 to 7.1% in1999-2000. So still main source of revenue of banks in Pakistan is spread rate.

3.3.5. Capital Risk The capital risk is induction of how a shareholders fund can absorb asset declines before depositors and creditors funds are put at risk. The financial reform with prudential regulation of adequate capital ratio is designed to ensure that depositors and creditors funds are not put at risk. There is inverse relationship between capital risk and exposure of depositors funds to risk. Thus higher the ratio of capital to advances, the less the capital risk, the greater the protection for depositors funds and the less the risk of exposure of depositor and creditors funds.

62

Table 3.7.CAPITAL RISK OF MCB & ABL BEFORE AND AFTER PRIVATIZATION
( Rs in 000)
Bank %of total capital to total Loan MCB Year ABL Before privatization 1987 97.17 1986 8.28 1988 30.41 1987 12.11 1989 28.02 1988 14.55 1990 202.93 1989 13.51 1991 158.21 1990 14.72 After Privatization 1997 22.65 1997 17.75 1998 19.70 1998 21.64 1999 18.82 1999 18.38 2000 26.03 2000 N.A 2001 20.67 2001 N.A

Source: appendix 3.4 The results of study show that capital risk at sector level as well as for these two banks remain negative. The capital risk ratio of MCB is showing decline 97.17 in 1987 to 20.67 in 2001, while the capital risk ratio of ABL was 8.27 negative in 1986 increased to 18.38 in1999. So ABL show slight improvement in management of capital risk after privatization. 3.3.6. Capital Adequacy Measurements The capital adequacy ratio of all banks in Pakistan is showing improvements. The capital adequacy ratio in 2000 was 9.2 % increased to 9.7% in 2002 showing slight improvement. To prepare the Pakistani banking sector for the emerging challenges of globalization, it was required to have fewer institutions, but with sizable capital base. Although a risk based capital adequacy system was already in place since 1997, the existing system was not encouraging the small private sector banks to achieve the economies of the scale. To address this issue the SBP doubled the minimum paid up capital (net of losses) requirement for schedule banks to Rs.1.0 billion. The study shows that the capital adequacy of banking sector as whole and the two banks of case study improved. The capital adequacy ratio for MCB (before privatization) was 2.88% in 1987 while in 2001 (after privatization) the ratio is 11.81% showing increase of 9% approximately. The capital ratio of ABL was very high before privatization. It was 29.52% in 1986 but data after privatization is not available to compute the ratio for after privatization period.

63

Table 3.8. CAPITAL ADEQUACY OF MCB & ABLBEFORE AND AFTER PRIVATIZATION
( Rs in 000) Bank %of Share holder contribution to total Assets MCB ABL Before privatization 1987 2.88 1986 29.52 1988 9.35 1987 23.86 1989 9.08 1988 26.80 1990 7.79 1989 25.05 1991 9.45 1990 20.09 After Privatization 1997 10.29 1997 0.24 1998 12.08 1998 0.20 1999 12.49 1999 0.20 2000 7.77 2000 N.A 2001 11.81 2001 N.A

Source: appendix 3.5 3.3.7. Interest Rate Spread Banking spread (or intermediation cost) is a measure of efficiency of the financial institutions. A higher spread shows a less efficient financial system. Pakistan had a very high spread till 2001, however, recent developments in external and monetary sector helped the banking system to brought down the banking spread to 7.3 percent in FY03 due to a more pronounced decline in lending rates than rates on deposits. Specifically, a sharp slide in the rate of returns on government papers made this customary investment avenue unattractive for the banks. In fact, ample liquidity forced banks to introduce new financial products and explore new market segments such as consumer financing. Although lending rates fell significantly, intense competition improved the banks efficiency and profitability. In this background, it is expected that further improvement would be realized in financial sector efficiency in terms of lower intermediation cost. This is the difference between the average interest rate on their loans and the average interest rate paid on deposits. There are several established methods of calculating interest rate spreads (or margins). One approach is:

Interest received Interest Rate Spread= Interest earning assets

interest paid total deposit

This approach shows a banks spread from the viewpoint of its customers. The interest rate spread charged by institutions represents a cost imposed on their customers. The wider the spread, the greater the cost; depositor receive a lower rate and borrowers pay a 64

higher rate. Generally accepted views about privatization are that it will increase competition and in competition between banks will decrease spread rate.

Figure 3.4 Spread Rate Before Privatization

0 3.3 2.07 1990 2.64 1989 3.37 3.06 1988

1991

1987

Figure 3.5 Spread Rate after Privatization

2001 7.83 6.2 2000

0 4.5

1997 5.29

6.76 1999

1998

Source: Annual report of State Bank of Pakistan (2001-2002). The data shows that spread rate before privatization was lower as compared to spread rate after privatization. Just spread rate is not enough to draw conclusion that efficiency of the banks are not improved. Possible reasons for the above developments are: Lack of active competition in the banking sector for saving. Large reserve requirements by the SBP that do not earn any interest rates. Higher spreads may be used as a hedge against inflationary pressures in Pakistan economy. 65

Hedged attempts to cover interest foregone on higher reserve requirements. Huge value of NPLs on their Balance Sheets. High administrative cost. Over staffing Higher risk of business default Increasing volume of bad loans of financial institutions.

Increase in banking spread should, however, be interpreted with caution. In pre-reform period, interest rates were controlled from both sides, with the floors on deposit rates and ceilings on lending rates. The widening after the reforms largely indicated the change from a repressed to a liberalized interest rate regime. However, the interest rate spread widened from 4% in 1990 to 4.5% in 2000 showing that the reforms did not succeeded in increasing the efficiency of the banking sector. General views of the researchers are that privatization increases competition and competition increases efficiency and efficiency gives birth to new products. The data shows that these two banks have created too many new products and services after privatization. No doubt these products are not new on world level but totally new on Pakistan level. INNOVATIONS MCB Product and Services 1. Consumer Banking Specialized products Remit Expense Rupees Traveler Cheque Master Card Easy Personal Loan Car Cash Pyara ghare Specialized Accounts Saving 38s Khushali Bachat Pak rupee Foreign Currency A/Cs

66

2. Corporate Banking 3. MCB International------Dollar Khushali A/Cs Monthly Khushali A/Cs---1. Speed Cash 2. Home remittance 3. Money Gram and Global money 4. Drawing Arrangements 4. MCB Islamic Banking

MCB on Line Products MCB ATM Services--------- MCB ATM Bill Payment MCB Mobile Banking MCB AM Fund Transfer MCB Call Center MCB ATM Cash Card MCB Debit Card MCB Smart Card

ABL New Product and Services 1. All time Banking 2. Inter Branch Transactions 3.Allied Expense, Electronic Funds Transfer For Overseas Pakistani 4.Corporate Service------Trade Finance ABL Evergreen Products Saving Account Lockers Seasonal Finance Foreign Currency Accounts Travelers Cheques Term Deposits

MCB On Line Branches Swat, Murree, Abbotabad, Haripur, Peshawar, Islamabad, Sialkot, Sargodha Gujranwala, Sahiwal Lahore, Faisalabad, Bhawalpur, Multan, Quetta, Kamoki, Sadiq

MCB ATM Branches

Abad, Rahimyar Khan, Sukkur, Larkana , Hyderabad, Karachi. On the basis of competition all banks in Pakistan have introduced different new products and services to attract the customers, which is one important sign of improvement in efficiency of Banking Sector. 67

3.3.8. Intermediation Proxies One of the important functions of the banks is to link lenders (surplus units) with borrower (deficit units). The developed banking sector can accelerate the financial saving mobilization and credit allocation to private sector. The extent to which financial institutes intermediate between the business community and depositors, in terms of raising financial resources for credit allocation, has been measured in term of demand deposit/total deposits and long-term (quasi money)/total deposits. The intermediation proxies, in terms of credit allocation, are measured by the followings: Private loans/total loans or advances Public loans/total loans Government loans/total loans Total credit/total deposit or the loan deposit ratio. Intermediation Proxies
Before privatization 1987 19.60 28.96 69.35 58.03 1986 NA NA 55.83 1988 22.14 20.00 74.63 59.80 1987 70.70 19.37 49.07 1989 22.69 22.00 82.42 61.39 1988 80.18 07.29 37.68 1990 22.95 20.70 80.24 68.57 1989 NA NA 48.61 1991 25.40 22.15 81.34 59.95 1990 NA NA 56.06 After Privatization 1997 36.66 28.34 12.01 51.74 1997 NA NA NA 1998 23.25 26.68 4.4 50.81 1998 91.17 08.83 NA 1999 17.10 27.21 NA 51.73 1999 95.00 05.00 ,57.12 2000 21.37 21.14 NA 63.50 2000 NA NA 55.81 2001 22.02 18.39 NA 49.55 2001 NA NA 59.35

Table 3.9. Bank Intermediation proxies

MCB % of demand deposits to total deposits % of long term deposits to total deposits % of private loans to total loans % of total loans to total deposits

ABL

% of private loans to total loans % of public loans to total loans % of total loans to total deposits

Source: See appendix 3.5 The level of financial intermediation shows the confidence in the banking system. This could be measured by using currency to M2 ratio or currency to deposits ratio. Currency to M2 ratio fell marginally from 25.4 percent in FY00 to 24.6 percent in FY01 and remained at the same level in FY02 then fell again to 23.8 in FY03. It shows higher intermediation in FY02 that implies people preference to hold lower cash compared to 68

the bank deposits. The improvement in FY03 is also attributed to increasing use of ATMs and other means of electronic banking. Efficient allocation of credit also requires diversification of assets portfolio. Concentration of credit in few sectors of the economy makes the financial sector vulnerable to the performance of these sectors. Financial reforms in Pakistan did not appropriately address this problem. In total credit the share of large scale manufacturing sector, which was 42 % in 1990, further increased 50.9% in 2000. The share of manufacturing sector in real GDP is less then that of agriculture but its share in bank credit is more then twice compared with the credit share of agriculture. (Pakistan Financial Sector assessment 1990-2000) The study shows that that private loan as ratio of total advances increased both at the sector level as well as banks level selected as a case study. The ratio of private loans to total loans of MCB was 69.35% in 1987 increased to 92.5% in 2000 and 78.05% in 2001. While ratio of private loans to advances of ABL was 71% in 1987 increase to 95% in 1999. Slight changes are also noted in public loans measured as ratio of advances, that are 12.05% in 1987 increased to 21.95% for MCB and 19.37% in 1987 decreased to 5.01% in 1999. The study also shows that the ratio of demand deposits to total deposit remain stable for sector level as well as for MCB and ABL. While ratio of quasi money to total deposit shows increase on sector level but stable on banks level.

3.3.9. Management Competence Although it is difficult to comment on the management performance of the banking sector without taking qualitative factors into account, expenses to income ratio and intermediation cost can be used to assess the overall management performance. Both indicators have recorded notable positive changes during the years under review. So the measure of efficiency is the extent to which management uses resources at its disposal to generate income through the delivery of financial services to the public. Both income/assets and income/fixed assets measured management efficiency in resources 69

utilization. An efficient bank operation manifests in greater income per unit of assets then does less efficient bank operations. The analysis shows tremendously increases in income/t. assets of MCB after privatization. The income/asset ratio of MCB was .97% in 1987 and 1.123% in 2001. Similarly the ratio of income/fixed asset was 35% in 1997 and 57.41% in 2001. While the ratio of income/assets and income /fixed asset for ABL is showing decreasing after privatization. Result of one bank should not be interpreted as unfavorable indicator.

Table3.10

Management Competence

Bank MCB
% of income to Assets % of income to Fixed Assets % of income to Assets % of income to Fixed Assets

Before Privatization
1987 0.566 1988 0.636 1989 0.631 1990 0.364 1991 0.381

After Privatization
1997 0.822 1998 0.632 1999 0.763 2000 0.757 2001 1.123

127.4

147.8

171.3

91.09

112.1

34.98

26.60

34.79

36.67

57.41

ABL

1986 0.273

1987 0.264

1988 0.24

1989 0.194

1990 0.179

1997 0.038

1998 0.190

1999 0.066

2000 NA

2001 NA

52.96

54.93

52.14

49.72

46.83

3.296

6.815

2.322

NA

NA

Source: See appendix 3.6 3.3.10. Earning and Profitability

.

Earnings quality for a bank generally refers to the composition, level and stability of banks profits. A banks ability to earn adequate return on its assets has direct bearing on its safety and soundness. The inability could lead to the failure to adequately: (1) serve the credit need of customers, (2) provide for the losses of the bank that may arise during its operations, and (3) build the capital to absorb any adverse shock due to macro or micro reasons. This ultimately means that depositors are at greater risk and shareholders 70

return may become inadequate. The banks in Pakistan have been finding difficulties in earning positive profits since 1997. besides other reasons, a prime factor was the transition cost of ongoing reform process. Earning and profitability ratios are use to evaluate the efficiency of banks. The ratio used to measure profitability is: Return on assets Return on equity Return on share.

In term of ROA is increased for MCB .57% in 1987 to 1.123% in 2001 while ROE is increased from 1.56% 1987 to 13.27% 2001. While ROA for ABL is .27% in 1986 to 3.45% in 1999 and ROE is 8.05% 1987 decreased to .70% in 1999. As whole banking sector has improved profitability performance. Earning per share of both banks is increased after privatization. Table 3.11 Bank Description Year
Return of Assets %of income Assets Return of equity % of income capital year Return of Assets % of income Assets Return of equity % of income capital to 1.565 to 1986 0.273 to 8.076 to 6.295 6.269 4.862 3.738 0.477 1.834 0.700 NA NA 1987 0.264 1988 0.234 1989 0.194 1990 0.179 1997 1.832 1998 8.753 1999 3.445 2000 NA 2001 NA 5.670 5.728 2.839 3.601 8.471 7.640 9.537 5.879 13.27 1987 0.566

Earning and Profitability Before Privatization

1988 0.636 1989 0.631 1990 0.364 1991 0.381

After Privatization
1997 0.823 1998 0.632 1999 0.763 2000 0.757 2001 1.123

MCB

ABL

Source: See appendix 3.7

3.3.11. Liquidity Management Liquidity management serves various purposes. To sure the availability of funds meet withdrawal of demand To meet reserve requirements needs of banks. 71

To meet short term expenses of the banks Cash as ratio of demand deposits Liquid funds/total deposits Liquid funds as ratio of total assets.

Researcher examined the following proxies:

The study shows that cash ratio of demand deposit for MCB remain stable while for ABL there has been slight decrease. Liquid funds for total assets of MCB are increased from 70.80% in 1987 to 123.19% in 2001but ratio for ABL is showing higher fluctuation. Liquid funds as ratio for total assets is concerned are showing improvement for MCB i.e. 44.17 in 1987 and 101.78 in 2001. The same ratio for ABL is also showing increase that is 42.50 in 1986 and 52.02 in 1999. The liquidity ratio for banking sector is also showing improvement due to SBP prudential rules. (See appendix 3.5) Table. 3.12

Source: Annual Report of State Bank of Pakistan.

72

Part 111 Ratio Analysis

3.4 Comparative Study of Private VS Public Sector Banks

3.4.1 Introduction Pakistan undertook ambitious financial reforms in the early 1990s in an effort to establish a more market-based system of monetary management. These reforms have included such measures as the liberalization of interest rates, the removal of quantitative controls on lending, the lifting barriers to competition, the privatization of public financial institutions, and the introduction of market based securities. The principal aims of the reforms have generally been to raise both the level of investment and the efficiency of its allocation and to enhance provision of financial services to all sectors of the economy. MCB and ABL are privatized with the same consideration. In this paper we have analyzed performance of the MCB and ABL to make comparison with similar bank but working in Public Sector. Privatization of UBL is announced but due to some reasons the bank is still working under control of Government. Different techniques can be used to make comparison between different firms or different divisions of the firm. We have selected Ratio analysis technique for comparative study of three banks one in public sector and other two in private sector. Ratio analysis is age-old technique of financial analysis and helpful in deciding about the efficiency and performance in the past and likely in the future but suffer from some serious limitations. Three Banks, two privatized and one of Public sector banks were selected for the study are Muslim commercial bank limited, Allied Bank Limited (Privatized) and United bank Limited (Public Bank). Financial statements of three banks are taken for ratio analysis to evaluate the efficiency and performance of Privatized and public sector banks.

73

3.4.2. Ratios Used In Analysis is

3.4.3: Earning Assets to Total Assets Earning assets includes loans, investment in securities, and money market assets. It excludes cash and non-earning deposits plus fixed assets. This ratio shows how well bank management put bank assets to work. High performance banks have a high ratio. Earning assets to total assets ratio can be calculated by dividing average earning assets by average total assets.

Earning Assets To Total Assets = Average earning Assets Average Total Assets

3.4.4: Return on Earning Assets Return on earning assets, computed by dividing net income after taxes by average earning assets, is a profitability measure to be viewed in conjunction return on assets and return on equity.

Return on earning Assets = Net Income After Tax Average earning Assets

3.4.5. Interest Margin To Total Assets This is a key determinant of bank profitability, for it provides an indication of management ability to control the spread between interest income and interest expense. This ratio can be determined by interest margin by average interest earning assets.

Interest margin to average earning assets= Interest margin Average earning Assets 74

3.4.6. Loan loss coverage Ratio The loan loss coverage Ratio, computed by dividing pre tax income plus provision for loan losses by net charge offs, helps determine the asset quality and the level of protection of loans.

Loan loss coverage ratio= EBT+Provision for loan losses Net charge offs

3.4.7. Equity Capital To Total Assets This ratio is also called funds to total assets, measure the extent of equity ownership in the bank. This ownership provides the cushion against the risk of debt and leverage. This ratio is computed by dividing shareholders equity by total assets.

Equity capital to Total assets = Average Equity Average Total assets

3.4.8. Deposit Time Capital The ratio of deposit time ratio concerns both depositors and stockholders. To some extent, it is a type of debt/ equity ratio, indicating a banks debt position. More capital implies a greater margin of safety, while a larger deposit base gives a prospect of higher return to shareholders, since more money is available for investment purposes. This ratio is computed by dividing average total deposits by average equity.

75

Deposit time capital= Average total deposit Average equity

3.4.9. Loans to Deposits Average total loans to average total deposits is a type of assets to liability ratio. Loans make up a large portion of the banks assets, and principal obligations are the deposits that can be withdrawn on the requestwith in time limitations. This is the type of debt coverage ratio and it measures the position of the bank w with regard to taking risks. This ratio is computed by dividing average total loans by average total deposit.

Loans to deposits ratio = Average total loans Average total deposits

76

Table 3.13

Ratios for the MCB

1998 1999 2000 2001 2002 Average 86.52% 81.20% 0.99% 5.28% 4.21% 2.68% 0.62% 5.45% 8.81% 2.53%

Earning Assets to Total Assets Return on Earning Assets Interest margin to Average Earning Assets Loan Loss Coverage Ratio (times Per Year) Equity Capital To Total Assets Deposit Time Capital (Time Per Year) Loans to Deposits

81.06% 77.20% 81.48% 79.72% 0.33% 0.47% 0.55% 0.76% 5.015 5.25% 5.20% 6.51% 2.42% 26.86% 3.06% 7.50% 2.39% 2.44% 2.52% 2.62% 34.69% 33.74% 31.71% 30.68% 51.98% 51.72% 63.50% 49.55%

29.85% 32.13% 43.20% 51.99%

Source. Ratios are calculated from annual reports of MCB * Ratios are calculated on actual figures; therefore, there may be little bit difference.

Table 3.14 Percentage Changes in the Ratios

Years Earning Assets to Total Assets * Earning Assets to Total Assets ** Return on Earning Assets * Return on Earning Assets ** Interest Margin to Average earning Assets * Interest Margin to Average earning Assets ** Equity capital To Total Assets * Equity capital To Total Assets ** Loans to Deposits*

1998 100% 100% 100% 100% 100% 100% 100% 100% 100%

1999 -3.86 -3.11% 43.06% 43.06% 4.81% 4.81% 2.36% 2.36% -0.51

2000 4.28 -2.66% 18.90% 70.09% -1.00% 3.76% 3.13% 5.57% 22.79%

2001 1.76% -1.28% 37.01% 133.05% 25.18% 29.88% 3.89% 9.67% -21.97%

2002 3.3% 2.32% 29.71% 202.28% -18.87% 5.37% 2.25% 12.14% -12.83% -16.90%

Loans to Deposits** 100% -0.51 22.16% -4.67% * Ratios are calculated by taking last year with respect to each year as a base year. ** Ratios are calculated by taking 1998 as a base year for each year.

77

Table 3.15

Ratios for ABL

1995 Earnings Assets to Total Assets Return on Earning Assets Interest Margin to Average Earning Assets Loans Loss Coverage Ratio Equity Capital to Total Assets Deposit Times Capital Loans to Deposits

1996

1997

1998

1999 Average 67.2 8% 0.11% 2.46% 1.57% 46.98% 57.62%

51.59% 52.53% 78.61% 76.63% 77.04% 0.32% 5.74% 1.21% 0.15% 4.16% 1.40% 0.03% 0.74% 1.77% 0.03% 1.23% 1.89% 0.01% 0.44% 1.57%

50.12% 42.76% 41.08% 45.89% 55.07% 57.80% 58.03% 57.12% 55.81% 59.35%

Source: Annual Reports of Allied bank Of Pakistan Limited for 1994 to 1999. * Ratios are calculated on actual figures; therefore, there may be little bit difference.

Table 3.16

Percentage Change in Ratios

1995 1996 -2.52% -2.52% 1997 23.03% 19.93% 1998 21.02% 45.14% 1999 -0.86% 43.89%

Earning to Total Assets * Earning to Total Assets ** Return on Total Assets* Return on Total Assets** Interest Margin to Average Earning Assets* Interest Margin to Average Earning Assets** Equity capital To Total Assets* Equity capital To Total Assets** Loans to Deposits* Loans to Deposits**

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

-57.89% -82.63% -27.52% -82.25% 15.85% 15.85% 0.39% 0.39% 26.84% 46.94% -1.57% -1.18%

19.98% -55.26% 65.98% -63.85% 6.35% -16.77% 56.27% -2.29% -3.45% 30.06% 6.35% 2.68%

-57.89% -92.68% -91.22% -96.07% -27.52% -87.13% -78.65% -92.28%

Figures are calculated by taking last year with respect to each year as a base year.* Figures are calculated by taking 1995 as abase year for each year.**

78

Table 3.17

Ratios for UBL

1998 1999 75.51% 0.46% 2.49% 1.17% 3.87% 21.48% 48.17% 2000 73.24% 0.58% 4.11% 5.17% 3.98% 20.31% 57.63% 2001 70.58% -6.57% 4.45% -8.31% 2.36% 34.63% 58.16% 2002 Average 75.71% 1.09% 4.44% 4.14% 2.77% 30.47% 47.84% 74.84% -0.33% 3.45% -0.12% 1.52% 17.93% 50.59%

Earning Assets to Total Assets Return on Earning Assets Interest margin to Average Earning Assets Loan Loss Coverage Ratio Equity Capital To Total Assets Deposit Time Capital Loans to Deposits

79.19% 2.81% 1.79% -3.31% -5.38% -17.26% 41.17%

Source. Ratios are calculated from the annual reports of UBL

Table 3.18

Percentage Changes in Ratios (UBL)

1998 Earning Assets to Total Assets * Earning Assets to Total Assets ** Return on Earning Assets * Return on Earning Assets ** Interest Margin to Average earning Assets * Interest Margin to Average earning Assets ** Equity capital To Total Assets * Equity capital To Total Assets ** Loans to Deposits* Loans to Deposits** 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

1999 -4.65% -4.65% -83.81%

2000 -3.00% -7.51%

2001 -3.64% -10.88%

2002 7.27% -4.40%

26.38% -1241.17% 116.53% -333.53% -61.39% 8.23% -0.18%

-83.81% -79.54% 38.96% 65.31%

38.96% 129.72% 2.95% -171.84% 173.96% 16.99% 16.99% 19.64% 39.97% -171.84%

148.62% 148.18% 17.16% -143.86% 151.39% 0.92% 41.26% 17.74% 16.20% -40.69%

* Ratios are calculated by taking last year with respect to each year as a base year. ** Ratios are calculated by taking 1998 as a base year for each year.

79

Table 3.19

Comparison MCB (Average) UBL (Average) ABL (Average) Industry Average

Earning assets to total assets

81.20%

74.84%

67.28%

73.49%

Return on earning assets

0.62%

-0.33%

.12%

0.14%

Interest margin to average earning assets Loan Loss coverage Ratio

5.45%

3.45%

2.46%

3.79%

8.81

(.12)

4.35

Equity Capital To Total Assets Deposit Time Capital

2.53%

1.52%

1.57%

1.87%

32.13

17.93

46.98

32.35

Loans to Deposits

51.99%

50.59%

57.62%

53.40%

80

Table 3.20

Financial Indicators MCB

Assets (% of Assets of NCBs) 18.1 21.5 18.2 28.3 Deposits (% of deposits of NCBs) 17.6 20.8 18.3 26.5 Advances (% of advances of NCBs) 17.7 21.9 21.5 26.7 NPLs (% 0f total loans) 18.1 11.6 14.4 11.3

1994 1997 2000 2003

Source: Financial Sector Assessment 2001-2002,State bank of Pakistan

Table 3.21

Financial Indicators of ABL

Assets (% of Assets of NCBs) Deposits (% of deposits of NCBs)

Advances NPLs (% 0f total (% of loans) advances of NCBs) 1994 9.6 9.8 10.9 16.6 1997 10.4 10.6 12.5 17.9 2000 11.7 13 14.2 29.4 2003 12.2 14.3 11.2 43.8 Source: Financial Sector Assessment 2001-2002,State bank of Pakistan

81

3.5 Findings:
Earning Assets to Total Assets According to the findings, five years average ratio of MCB is 81.20%, which is higher then the industry average. This shows the performance of MCB is comparatively better as compared to the average of UBL, which was working in public sector but recently privatized. While the performance of UBL is better then ABL which was good in the start but suffer with management problem in 1999. This indicates that UBL has also done well its assets to work but not better then MCB. Return on Earning Assets The Industry average of return on earning assets ratio is obtained as 0.14%. By examining the results, it can be seen that return on earning assets ratio of MCB is 0.62%, which higher then industry average. It means that profitability of MCB was relatively better then the industry. Where as the average ratio of ABL is 0.12% lower then average ratio of UBL that is 0.33% lower then industry average. The analysis clearly shows that just privatization is not enough for improvement in efficiency but proper management is also necessary for development and efficiency. ABL is handed over to management of the Bank, where the management remains the same when the bank was working in the public sector. Interest Margin To Average Earning Assets Interest margin to average earning assets ratio for the industry is calculated as 3.79%. MCB average ratio is higher then the industry average i.e. 5.45%, where is UBL and ABL ratio are lower then the industry i.e. 3.45% & 2.46% respectively. This indicates the MCB profitability is higher then the industry. Whereas UBL and ABL not performed well in terms of profitability as compare to the industry. Loan Loss Coverage Ratio The industry average for the loan loss coverage ratio is 4.35 times. The average loan loss ratio for MCB is 8.81 times and for UBL is .12 times. This indicates that MCB has higher protection against loan and good quality assets. Whereas opposite is the case in 82

UBL. However, for ABL this ratio is not calculated, as ABL had not made provision in 1995, and 1996 as well it had not written off its bad debt in the year 1995, 1996, 1997, 1998 and 1999. Equity Capital to Total Assets The industry average for equity capital and total asset ratio is 1.87%, whereas five years ratios of MCB, UBL and ABL are 2.53%, 1.52% and 1.57% respectively. The data is showing clearly that MCB has better results then the industry and has more cushion of equity against the risk of using debt, While opposite is the case in UBL and ABL. Deposit Time Capital The industry average for deposits time capital ratio is 32.35 times, whereas average ratios for MCB, UBL and ABL are 32.13, 17.93 and 46.98 times respectively. Only ABL has higher average ratio than the industry. The other two banks have lower ratios this shows that they have more capital against deposits and more margin of safety. Loan Deposits The industry average for equity capital and total asset ratio is 53.40%, whereas five years average ratios of MCB, UBL and ABL are 51.99, 50.59% and 57.62% respectively. By examining the results it is clear that ABL had more risk from debt stand point as compare to UBL and MCB.

3.6 Conclusions State regulators not only in Pakistan but through out the world regularly assess the financial condition of each bank and specific risk faced via on site examinations and periodic reports. Federal regulators rate banks according to the Uniform Financial Institutions Rating system, which now encompasses six general categories of performance under the label CAMELS. Each letters refers to a specific category, including: C= for capital adequacy A= for asset quality M=for management quality 83

E=for earnings L=for liquidity S=for sensitivity to market risk Regulators numerically rate each bank in each category, ranging from the higher or the best rating (1) to the worst or lowest (5) rating. It also assigns a composite rating for the banks over all operation. A composite rating (1) or (2) indicates a fundamentally sound bank. A rating of (3) indicates that bank shows some underlying weakness that should be corrected. A rating of (4) and (5) indicates a problem bank with some near term potential for failure. The TARCSIMEL used in this study is similar to CAMELS but with some extra categories. Summary of empirical studies on state versus private ownership of banking clearly shows that private owned banks are efficient than state owned banks. Bonin, Caprio and Paul Wachtel (2002) examine the impact of ownership structure state, private and foreign owner ship on bank performance in six transition economies. The authors find robust evidence that profitability ---measured by return on assets and return on equity is higher for fully private banks than for banks with some state-ownership. Berth, Caprio and Levine (2003) used a new data base on bank regulation and supervision in 107 countries to assess the relationship between specific regulatory and supervisory practices and banking sector development, efficiency and fragility. They found that government owner ship of banks is negatively correlated with favorable banking outcomes and positively linked with corruption. Cornette, Guo, Khaksari and Tehranian (2003) examine performance differences between privately owned and state owned banks in 16 Far East countries from 1989 through 1998.They find that state owned banks are significantly less profitable then privately owned banks. The performance differences are more acute in those countries where government involvement in the banking system is the greatest. On the basis of the findings of these different studies and results of my own analysis I conclude that privatization of banks will have positive impact on efficiency of banks in Pakistan.

84

Part 1 Using DEA approach; Akhtar (2002) has conducted a preliminary study of XEfficiency Analysis of commercial banks with ownership forms. On similar lines but with privatization prospective, DEA approach has been applied to Muslim

commercial bank and Allied Bank to determine the relative efficiency of these two banks selected as a case study. Table No 3.1, 3.2, 3.3, and 3.4 shows that in both cases relative efficiency has exceeded unity implying that the banks has improved their performance after being privatized.

Part. 1I. Nine areas are examined in this study and most of them are showing improvement. The main problem of Pakistani banking sector was failure of governance due to government and political influence and non-performing loans. The study shows that both problems were controlled through State Bank prudential rules. Profitability and liquidity of the two banks selected as case study also improved. Because of competition new products are invented but the spread rate is still high and needs decrease to attract borrowers to stimulate economic activities. It is hoped that with the passage of time and increase in competition the sector will further improve efficiency.

Impact analysis of privatization (MCB)

There has been a marked improvement in the performance of MCB following its privatization, as can be seen from its financial indicators. A healthy growth in the assets of the bank can be observed, which by the end of 2003, represented over 28 percent of the assets of the nationalized commercial banks. Similar growth can also be seen in the deposits and advances of MCB, with deposits and advances standing at 26.5 and 26.7 per cent respectively in 2003. The non-performing loans as percentage of total advances have declined significantly during the period under consideration, reaching 11 percent of gross advances by 2003. If 85

we take the net NPL ratio for the bank, this figure comes out close to 2 percent, which compares very favorably with net NPL ratio for the entire banking system at 5.5 percent. Profitability of the bank has also improved significantly, while return on assets increased from 0.2 percent in 1993 to over 0.8 percent in 2003.

Impact analysis of privatization (ABL)

Unlike the case of MCB, the performance of Allied Bank does not show any improvement after its privatization. In fact, some of its financial indicators show considerable deterioration in the post privatization period. Assets and deposits have shown only a marginal improvement. Advances, which had grown somewhat initially declined in the later years. The most alarming development has been the jump in non-performing loans of ABL. NPLs as a proportion of total loans reached nearly 44 percent by 2003 from 16 percent in 1993. It is interesting to note that in 1994, the NPLs of MCB were slightly higher than those of ABL. While the new management of MCB was successful in bringing down the NPLs, the employee management group in ABL was responsible for a drastic increase in the NPLs. As a result of the increasing NPLs, the profitability of Allied Bank has also suffered, the bank made huge losses between 2000-02. The situation only started improving after the SBP removed the Board of Directors in 2001, replacing it with a new Board. The ROA has been negative since 1999, and the bank came out of the red only in 2003. Part 111 Ratio Analysis Ratios provide a very simple and effective method for looking at the financial performance of any business by analyzing the financial accounts of the business. Ratio can prove to be a valuable analysis tool, but they are based on looking at accounts, which are only true for one day in time. However, the ratio analysis of three banks clearly shows that performance of MCB (privatized bank) is better then Performance of UBL (public sector bank). The performance of ABL is lower in rank from UBL not because of privatization but because of management problems of the bank. On the basis of ratio analysis results I conclude that privatization improve efficiency. 86

CHAPTER 4 Privatization of Banks and its Impact on Economy

4.1 Introduction A well functioning financial system is a pre-requisite for the economic development of any country. A large body of recent theoretical and empirical research has also confirmed the view that the development of financial markets and institutions in a country is crucial for economic growth. (Thorsten et al. (2000) & Khan and Senhadji (2000). Realizing this importance of the financial sector in economic development, some governments in developing countries sought to increase their ownership of banks and other financial institutions, in order to direct credit towards priority sectors. However, the importance of state-owned banks in many developing countries contrasts worryingly with recent research findings, which show that the state ownership of banks has serious negative effects on economies in developing countries. A recent study finds that state ownership is negatively associated with bank performance and the overall development of the financial sector. (Barth et al. (2001) A large theoretical literature shows that banks can reduce the costs of acquiring information about firms and managers and lower the costs of conducting transactions. By providing more accurate information about production technologies and by exerting corporate control, better banks can enhance resource allocation and accelerate growth [Boyd and Prescott 1986; Greenwood and Jovanovic 1990; King and Levine 1993b]. Similarly, by facilitating risk management, improving the liquidity of assets available to savers, and reducing trading costs, banks can encourage investment in higher-return activities [Obstfeld 1994; Bencivenga and Smith 1991; Greenwood and Smith 1997]. The government ownership of commercial banks resulted in political intervention into credit allocation and loan recovery decisions besides other institutional inefficiencies. As a result, infected loans increased sharply, financial institutions suffered losses and quality of services plummeted. In order to address to these issues, a number of policy reforms were undertaken to encourage the participation of private sector, and permitting it to open banks and NBFIs. 87

The primary stated goal of the privatization efforts was to promote the private sector as an engine for growth and to increase efficiency and productivity in economy. In general, it was claimed that privatization policies would improve efficiency of resource use, foster competition, enhance the role of private sector, and obtain higher rates of domestic savings and investment and, last but not least, attract and provide opportunities for foreign investors. In addition, privatization would, it was said, reduce the size of the state, reduce the fiscal deficit, provide better services and give the state immediate resources that would be used to reduce the short-term debt and invest in social infrastructure or reduce other social expenditures. (Ishrat Husain, 2003) There are several important benefits that come from privatizing a state owned banks. When banks were controlled by the government, it was primarily concerned with serving the interest of its owner. This means that politicians and bureaucrats use the banks as a means of patronage and corruption. The banks were overstaffed as cronies and lackeys were thrown on to the payroll. Services were poor as the managers did not gain anything by providing good services or expanding their business. Efficiency was lost and the banks run at a loss to meet its bloated payroll. This results in general revenue being used to balance the banks books and make up the losses. Precious tax receipts were flushed down the toilet to maintain the companies. Private sector competition was stifled or constrained as it would hurt the public sector banks and so the consumer losses out again. Without competition the public sector banks had no incentive to shape up. When banks were privatized, all these negatives were turned into positives. The banks had to stand on itself, so it improved its management and pared down its staff to a more appropriate level. The job losses that were feared were probably overstated and certainly dont justify the current situation. One of the first banks to be privatized has actually increased its total work force, as it became a real business intent on expansion and growth. The difference is that its workforce is actually there to work rather than collect a government check. In any capitalist economy the single most important function of banks is the provision of credit to those able to make the most productive use of it. The major strengths of United States are its highly developed capital markets that allow anyone with a good idea to get access to adequate financing. No modern economy can grow if capital is consistently 88

wasted, and this holds doubly true for a country like Pakistan, where there is only a small amount of capital available each year.

4.2 Privatization of Banks and its Impact on Economy Patrick (1966), who first introduced the idea of the bi-directional relationship between financial development (FD) and economic growth (EG), suggested two patterns in the relationship between financial development and economic growth. In the first pattern, which is called supply-leading, FD causes EG by allocating resources to more productive sectors. Patrick explains the functions of the supply-leading phenomenon as follows: to transfer resources from the traditional, low-growth sectors to the modern, high-growth sectors and stimulate an entrepreneurial response in these modern sectors. In the second pattern suggested by Patrick, called demand-following, economic growth creates demand for developed financial institutions and services. According to Patrick, the creation of modern financial institutions, their financial assets and liabilities and related financial services are a response to the demand for these services by investors and savers in the real economy. Since Patrick, a large empirical literature emerged testing the causal relationship between FD and EG. The main finding of these studies was the strong positive correlation between the financial structure and rate of growth of the economy. The relevant literature can be found in the detailed surveys of Levine (1997) and Tsuru (2000). Levine (1997), after reviewing many studies on the relationship between FD and EG, it states that broad cross-country comparisons, individual country studies, industrylevel analyses, and firm-level investigations point in the same direction: the functioning of financial systems is important for economic growth. According to the survey results, countries with larger banks and more active stock markets grow faster over subsequent decades even after controlling for many other factors underlying economic growth. Furthermore, according to these results, industries and firms that rely heavily on external financing grow disproportionately faster in countries with well-developed banks and securities markets than in countries with poorly developed financial systems. Levine also 89

emphasizes that there exists a less-developed theoretical literature on the influence of the level and growth rate of the economic activity on the financial systems, and this is an area that needs additional theoretical research. Recently, there are mainly three approaches in testing for the correlation between FD and EG. One approach is to test the hypothesis on a group of countries by using either crosssection or panel data techniques (King and Levine 1993, La Porta, Lopez-de-Silanes, Sheifer and Vishny, 1997, Levine 1998). Another approach is to present industry-level or firm-level evidence that measures this correlation (Rajan and Zingales 1998, DemirgKunt and Maksimovic, 1998). The third approach is to test the hypothesis for a particular country. To evaluate the impact of privatization of banks on economy I have considered two systems of financial structure i.e. banks-based versus market based financial system. In examining financial structure and economic development, historians, economists, and policy makers have examined the relative merits of bank-based versus market-based financial systems. For over a century, this work primarily involved careful country studies of Germany and Japan as bank based systems and the United States and United Kingdom as market based systems. Allen and Gale (1999) and Stulz, (2000). Joseph Schumpeter argued in 1911 that banks play a pivotal role in economic development because they choose which firms get to use societys savings. According to this view, the banking sector alters the path of economics progress by affecting the allocation of savings and not necessarily by altering the saving rate. Thus, the Schumpeterian view of finance and development highlights the impact of banks on productivity growth and technological change. Recent theoretical models have carefully documented the links between banks and economic activity. By economizing on the costs of acquiring and processing information about firms and managers, banks can influence resources allocation. Better banks are lower cost producers of information with consequent ramifications for capital allocation and productivity growth. (Diamond 1984; Boyd and Prescott 1986; Williamson 1987; Greenwood and Jovanovic 1990; and King and Levine 1993b). Alternatively, a vast development economic literature argues that capital accumulation is the key factor underlying economic growth. According to this 90

view, better banks influence growth primarily by raising domestic saving rates and attracting foreign capital. (See discussion and citations in King and Levine (1994), Easterly (1998), and Easterly, Levine and Pritchett (1999). Banks provide the raw material for a monetary production economy to work and grow. The positive impact of finance on economic growth has received significant empirical support during the nineties, starting with contribution by King and Levine (1993). The research showed also that countries with developed banking system and liquid capital markets have experienced the most rapid growth (Demirguc-Kum) and Levine, (1996,1997). It is easy to over look the relevance of financial system when it functions smoothly. However, its importance is evident in times of financial crises, such as during period of hyperinflation and when financial institution collapse, inflicting losses on their shareholders and depositors. The role of commercial banks in a countries economic growth is substantial. Today while the state of publicly owned institutions has been gradually improving the scars of poor management, bad loans and inefficient hiring practices have greatly curtailed the efficiency of institutions in the banking sector. Before we continue with our discussion we must first realize that the terms "economic growth" and "economic development" are two different ideas. While economic growth refers to the increase in wealth of a state economic development refers to social indices such as those included in the HDI (Human Development Index). In such a situation this study should have been aptly entitled "The role of commercial banks in the economic growth of Pakistan", however the link between the accumulation of wealth and an improvement in living standards cannot be ignored. In any case if banks were to focus on micro-credit and agricultural loans to poor farmers then indeed we would witness an increase in both GDP and the HDI. This study evaluates privatization of banks and its impact on economy using the data of schedule banks for country level as well as for two banks. I have used different methodologies to assess the relationship between banks and economic growth work on assessment of connection between banking sector development and sources of economic growth are available in the economic literature. (See King and Levine 1993b; and Levine and zerove 1998). I have selected the deposits, credits and advances, investments and 91

GNP as sources of economic growth. I have developed two hypotheses and then the correlation and time series between the sub hypotheses is calculated to see significance of correlation/regression. To observe the relation between the under study variable I draw a scatter diagrams for both hypothesis using statistical package M.S. Excel, the diagrams reveal the linear relation between the variables. Scatter diagram, presents one time series variable on the vertical axis with another time series on the horizontal axis. This gives the researcher an opportunity to infer visually some casual relationship between the two variables. To determine the extent of regression I have used the method of OLSD in time series analysis. I have also used the descriptive measures for the same data. We have observed that data is not very much dispersed.

4.3 HYPOTHESIS i) "Better the banking system, the greater will be the economic growth"

ii)

"The worse the banking system, the lesser will be the economic growth."

Dependent Variable Independent Variable

Economic growth Better Banking System

Sub Hypothesis: i) Dependent Variable Independent Variable The greater the number of deposits, the more will be the investment. Investment Number of Deposit

ii)

The more the lending, more will be the GNP 92

Dependent Variable Independent Variable

GNP Lending

VARIABLES 1. * * 2. 3. * 4. Investment Domestic Investment. Foreign Investment Deposits Loans and advances Lending GNP

4.4 INVESTMENT The first investment bank in the country was Cress Bank, which started its operation in 1985. This was the period in which most of private sector commercial and investment banks, Modarabas and leasing companies were also established. The fast expansion of financial sector, as feared in the beginning, has not only resulted in unnecessary competition, while the profit margins reduced, the economic slow down also effected the repayment ability of the borrowers. This caused a significant increase in the quantum of provisions against non-performing loans because of reduction in lending rates and persistent recessionary trends in the country. It is true that the recessionary trend in the country, spread over the last five years, is partly responsible for the poor performance of investment banks. However a fact cannot be ignored that to a large extent the management of these banks are responsible for their current dismal financial condition as they attained unnecessary exposure in capital markets. A large percentage of their income in the past was due to capital gains received from trading of shares. As the capital market took a nosedive in post 1994 period, most of their investment in equities reduced to about 20 to 25 percent of the original cost of purchase. 93

Investment banks initially classified this portfolio as short-term investment. As the share prices did not improve, the portfolio was classified as long-term investment to avoid heavy provisioning against diminution in the value of such investment. Despite this reclassification most of investments banks would not be able to avoid 100 percent provisioning against declining value for the year ending June 30, 1999. This is expected to result in huge losses for the year and many of these institutions would become virtually insolvent. As told above that there are presently 14 investment banks operating in Pakistan. All of these banks are public limited companies and listed at Karachi, Lahore and Islamabad stock exchanges. Most of these banks suffer from precarious financial position.

4.4.1 Effect of Freezing of Foreign Currency Accounts (FCAs) The problems of investment banks have aggravated further after freezing of foreign currency accounts (FCAs). Many of these institutions are on the verge of insolvency. There are hardly any prospects for turn around of investment banks as the economy is expected to continue to suffer from recessionary trend. Therefore, there is a need to explore ways and options to restore the vigour of these institutions and also minimize the agony of the shareholders. As the GOP is trying to restructure the financial sector, it is also necessary to decide the fate of investment banks.

4.4.2 Effects of Nuclear Tests on Investment The annual accounts of most of the listed companies in general and financial institutions in particular, have attributed the poor results for 1997-98 to post-nuclear situation. But one should not ignore a fact that the nuclear tests were conducted on May 28, 1998 and therefore, had hardly any impact on the operation of these entities. However the impact of economic sanctions during the first half of current financial year was visible some extent, though marginal only. The economic sanctions during the first half of 1998 financial year were visible to some extent, though marginal only. The economic sanctions slowed down 94

the undocumented economy proliferated during the sanctions period. That was the reason no scarcity of goods was ever felt. The prices of various items went up but it was the outcome of hoarding and profiteering practices of vendors. The annual report of state bank of Pakistan for the year 1997-98 also said that the recessionary trend in the country had started much before the nuclear tests and impositions of economic sanctions only aggravated the situation. It is necessary to examine the performance of each investment bank before making the financial decision about the fate of these banks.

4.4.3. Role of Banks Intermediating Foreign Capital Inflows Two Accounts are playing important role in the economic growth of each nation. (i) (ii) Capital account Current account.

Current Account of Maximum countries are deficit including the USA and Japan. While Capital Account of developed countries are surplus. Surplus Capital Account plays very important role in the economic growth. Developed banking sector can encourage foreign investors, which increase capital inflow and make the capital account surplus. The example of Swiss banks is enough in this regard.

4.4.4. Hesitation on the Part of Foreign Investors in Investing in Pakistan All the investors in the world are considering two things before making decision of investment in any project or country. How much risk is there and how much return is possible. They are trading off between risk and return. The banking sector where information disclosure and check on inside trading is not appropriate the investors will hesitate to make investment decision.

4.4.5. The Pakistani Financial Market is improving its Transparency & efficiency to cater to the needs of the Foreign Investors. 95

a)

The financial market in Pakistan, comprising of Commercial Banks, Development Financial Institutions, Special Finance Institutions, Investment Banks, Leasing Companies, Modarabas, Mutual Funds, Insurance Companies, Stock Exchanges, Credit Rating Companies, Fund Management and Brokerage Houses etc., is fully competent to fulfill the needs of international investors.

b)

The aggregate market capitalization as on 30th June 2001-2002 was 353.9 Billion rupees out of which the financial sector constitutes about 14.83%. (Source. Karachi stock exchange)

c)

The financial market has a very strong resource base and is fully competent even to generate more funds from different sources in order to meet the local component for foreign investment. The total deposits of scheduled banks, for example, are worth about 680 Billion in addition to the resources of other players in the market like Leasing Companies, Mudarabas & Investment Banks etc. etc. (Annual Report of SBP, 2001-2002)

4.4.6. Liberalization in Pakistan to Ensure Inflow of Foreign Investment a) Pakistan is passing through a phase of liberalization, deregulation and privatization - a march towards market economy. b) Any foreign investors including overseas Pakistanis can now invest in Pakistan. All investments made through foreign currency coming to Pakistan through accepted banking channels are repairable at the discretion of the investors. Even the investment made from rupee funds can be repatriable through indirect channel, namely to purchase and sale of FEBCs. c) The foreign investors can also operate business in Pakistan and can also meet their local currency financing requirements, working capital as well as longterm capital, from local market.

96

4.4.7. Modes of Financing in Pakistan and Outside a) A wide variety of financing techniques and instruments is available in the market including certain special Islamic Banking instruments. b) In comparison to other countries in Asia, Pakistan has also entered into the field of raising international corporate debt, international equity issues, cross boarder mergers and other sources of international financing.

Figure 4.1 Inflow of foreign investment in Pakistan(in Million US $)

2000.00 1500.00 1000.00 500.00 0.00 -500.00
19 84

FDI Portfolio Total

-8 7 -8 9 -9 1 -9 3 -9 5 -9 7 -9 9

19 86

-8 5

19 88

19 90

19 92

19 94

19 96

Source. Economic survey of Pakistan 2000-2001

4.4.8. DEPOSITS

Banking system totally depends upon the deposits. Without deposit it will have no money to lend or invest. Deposits are the amount of money that the general public gives to the banks for security or for earning interest. The efficient banking sector can pull saving from the peoples to build up deposit level. The figure 4.1 clearly shows that deposit level of the banking sector in Pakistan is improved just after privatization but later on went down due to some Political and macroeconomic factors. However, 2002 is showing 97

19 98

upward trend in the deposit of schedule banks of Pakistan.after Deposits are of many types, their terms and conditions changes by their types.

Different types of deposits offered by banks are: i) ii) iii) iv) v) Current Deposits Call Deposits Saving Deposits Fixed Deposits (different types by duration) Other Deposits

Deposits are classified into different categories to earn more profit, as well as to have an idea of money available for lending, for reserves and other purposes. These deposits have differs interest rates determined by their value.

Figure 4.2 Deposits of Scheduled Banks

Source: Pakistan: Financial Sector Assessment 1990-2000, SBP, 2002. 98

4.5. Test of Sub Hypothesis No.1

Correlation between Deposits and Investment (Rs in Million) Table 4.1 Years 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total X No. Of Deposits 18251389 19565836 20488157 21215465 21720814 22578568 23947814 25140528 26756571 30993837 27106754 27973622 29520563 31085736 31723719 32271603 29772355 29710720 28409347 28043818 526277216 Y Investment 32261.8 45033.5 38572.3 49056.1 60230.4 87273.6 85882.1 85303.9 81226.1 120021.0 192185.5 208043.1 267805.2 268794.3 322875.8 375286.2 420830.2 350326.2 338796.6 303782.4 3733585.7

Source: Banking statistics of Pakistan 2001 2002 State Bank of Pakistan.

99

Figure 4.3
500000 400000 Deposits 300000 200000 100000 0 0

Scatter diagram for hypothesis no.1

Series1

10000000

20000000 Investment

30000000

40000000

4.5.1. Results of Hypothesis No: 1 = 0.0249 Sum of Deposits = 526277216 Sum of Investment = 3733585.7 Average of deposits = 26313860.8 Average of investment = 186679.285 Dispersion in deposits= 4393029.337 Dispersion in investment = 132396.601 = 0.8285 2 = 0.6864 Assuming the distribution of deposits (x) and investment (y) as being bivariate normal, we wish to test the hypothesis that correlation coefficient of the population is greater then 0 .5 i.e.: O= = 0.5 VS I = > 0.5 Using the test statistics Z = Zf - z 1/ n-3 (1) 100

With n=20 period observations an x and y I test the hypothesis Ho at 5% level of significance. The calculated value of Z is 2.61417. This leads us to reject HO at 5% level of significance, and I conclude that population correlation coefficient between deposits and investment is greater then 50%. 4.5.2 Findings This means that variables "x", and "y" vary together 82.85% of the time". The coefficient of correlation ranges in values between (-1 and +1) this is simply a measure of the degree of Association or Covarriation that exists between variable "x" and "y" In simple regression analysis the regression line can be used to estimate the values of dependent variable on the basis of independent variable whose values are known. But in correlation analysis I study the degree of closeness of relationship between the variables. If two variables vary in such a way that changes in one variable are accompanied by changes in the other, the variables are said to be correlated/regressed. As my hypotheses was that deposits and investment are positively related, the hypothesis is true because deposit and investment are very closely related the logic behind is that if there is more money in general public they prefer to deposit it in banks thus deposits increases Now banks have more money for credit creation thus lending will increase resulted a high investment Coefficient of Determination R2 is defend as the ratio of the explained variations to the total variation 2 = As = 2= 2 0.6864 explained variations in y / Total variation in y

It shows that 68.64% of the variation in the investment is accounted for by the variation in the deposits.

101

4.6 Test of Sub Hypothesis No.2

Correlation between Lending and GNP (Rs in million) Scheduled banks Advances by Borrowers Table 4.2 Lending 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total 66842.3 80706.7 88941.8 105136.4 123397.5 121419.4 130012.4 142953.8 165618.7 189474.1 250283.6 303623.3 341114.5 417198.0 462415.0 532340.8 575069.7 629659.2 745719.3 746610.0 6218536.5 X GNP Y 317502 367807 413944 463375 507678 551809 630120 711143 796751 932282 1201301 1404853 1686020 1922755 2207230 2456520 2710396 2877082 3116245 3409083 28683896 GNP

Source: Banking statistics of Pakistan 2001 2002 State Bank of Pakistan.

102

Scatter diagram for hypothesis NO.2 Figure 4.4

comparison
4000000 Landing 3000000 2000000 1000000 0 0 2E+05 4E+05 6E+05 8E+05 GNP Series1

4.9.1 Result from Hypothesis No: 2 = 4.46 Sum of landings= 6218536.5 Sum of GNP = 28683896 Average of Independent Variable = 310926.825 Average of dependent Variable = 1434194.8 Dispersion in landing= 230586.3044 Dispersion in GNP = 1032937.732 = 0.997 2 = 0.994 (See the appendix 4.3)

A correlation coefficient of 0.997 is an indicator of high degree of positive correlation between lending (x) and GNP (y). However, it stills remain to test the hypothesis of correlation between x and y. Assuming the population of lending and GNP as being bivariate normal. With 20 observations in pair I test

103

HO = = 0.9 VS HI = >0.9 at 5% level of significance. The calculation of Z stated in (1) is then 7.3317 and Ho: = 0.9 is rejected at 55 level of significance. So we may conclude that correlation between x and y is grater then 90%.

4.6.2 Findings I see that there is a very higher degree of positive correlation is 0.997. It shows that the GNP is positively related to the lending of the banks. The reason behind is that due to the lending, the investments are increased and we know that an increase in investment will result in increase in GNP. 2 = = (2)

0.994 so it means that 99% of variation in GNP is explained by lending

4.7. Impact of MCB and ABL on Economic Growth. Performance before and after privatization (Rs. In Millions) Table 4.3 MCB Years 1990 2001 Increase in % Deposit 27691 154544 82.08 Advances 18987 76586 75.21 Investment 10688 55432 80.72 No. Of A/Cs 2891659 4392164 34.16

Table 4.4 ABL Years 1990 1999 Deposits 19824 93107 Advances 11115 55263 Investments 72668 26774 No. Of A/Cs NA NA Source: Annual reports for both banks for mentioned years.

Increases in % 78.7 80.00 73.00 NA

The progress report of both banks for pre and post privatization periods clearly indicates a huge percentage of increase in three sub- hypothesis selected for evaluation. The

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deposits of MCB before privatization were 27691 billion in Pakistani rupees that has increased 154544 billion in Pakistani rupees showing increase 78.7% after privatization. Advances and investment of MCB are also showing increase of 75.2% and 80.725 after privatization of the bank. The progress report of ABL is showing 78.7% increase in deposit base after privatization while the other two sub hypothesis, advances and investment are also showing increase of 80% and 73% respectively after privatization. All the variables selected in hypothesis as source of economic growth are showing increases. I conclude that injection of new deposits; advances and investments of these two banks in economy will have positive impact on economic growth and development.

4.8. Privatization and Fiscal Deficit One of the main objectives of the privatization has been reduction in fiscal deficit. Privatization is presumed to help in retiring the public debt and thus in reducing the debt servicing. At the same time the surplus of autonomous enterprises also tends to fall. If reduction in debt servicing exceeds the fall in surplus of autonomous bodies, budgetary deficit tends to fall. (A.R.Kemal,1996) Like many other developing countries fiscal profligacy has been the main underlying cause of macroeconomic instability in Pakistan. Before the adoption of privatization policy persistence of large fiscal deficit (on average, 7% of GDP) resulted in sharp accumulation of public debt as it increased from 91.3 percent to 103.0 percent of GDP during the 1990s. In 1990-1991 almost 38 percent of total revenue was consumed to finance debt servicing but after privatization of large number of manufacturing units and some banks, the percentage of total revenue reached almost 64% in 1999-2000. Realizing the weaknesses of Pakistans tax structure a concerted effort was launched some four years ago. The government launched a series of wide-ranging tax and tariff reforms on the one hand and fiscal transparency on the other, the overall fiscal deficit, which averaged almost 7.0% of GDP during the 1990s, has been reduced to 4.6% in 2002-2003. However the cumulative privatization receipt of Rs. 136316 million compare

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to a huge amount of debt in billion is rather small, but that can have a significant influence on the fiscal deficit. Years Table 4.5 Fiscal Indicators as % of GDP GDP real Overall Fiscal deficit Growth 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03(BE) 5.4 7.6 2.1 4.4 5.1 6.6 1.7 3.5 4.2 3.9 2.2 3.4 5.1 8.8 7.5 8.1 5.9 5.6 6.5 6.4 7.7 6.1 6.6 5.2 5.2 4.6

Source: Economic survey of Pakistan 2001-2002 Figure 4.5 Budget deficit as percent of GDP

Source: Pakistan: Financial Sector Assessment 1990-2000, SBP, 2002.

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The table 4.5 and figure 4.5 shows that over all fiscal deficit of the country before privatization was 8.8, but after privatization the budget deficit as percentage is 4.6%. No doubt this is not only because of privatization, other economic factors cannot be ignored.

4.9 Conclusion In Raymond W. Goldsmiths seminal book, Financial Structure and Development, he defined financial structure as the mixture of financial instruments, markets, and institutions operating in an economy. He sought to (1) trace the evolution of national financial systems during the process of economic development, (2) assess whether the overall development of the financial system influences the rate of economic growth, and (3) evaluate the impact of financial structure on the pace of economic development. Goldsmith was largely successful in documenting the evolution of national financial systems, particularly the evolution of financial intermediaries. Goldsmith met with more limited success in assessing the links between the level of financial development and economic growth. He clearly documented a positive correlation between financial and economic development across a large number of countries. A large theoretical literature shows that banks can reduce the costs of acquiring information about firms and managers and lower the costs of conducting transactions. By providing more accurate information about production technologies and by exerting corporate control, better banks can enhance resource allocation and accelerate growth [Boyd and Prescott 1986; Greenwood and Jovanovic 1990; King and Levine 1993b]. Similarly, by facilitating risk management, improving the liquidity of assets available to savers, and reducing trading costs, banks can encourage investment in higher-return activities [Obstfeld 1994; Bencivenga and Smith 1991; Greenwood and Smith 1997]. Stability of financial system has strong correlation with the economic growth and development of any country. A glance at the recent economic history reveals that weaknesses in the financial systems were the root cause of the economic woes of most of

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the economies. The supervisory authorities around the world are striving to ensure safety and soundness of their respective financial systems so that they can play an active role in the economic development of their countries. Although there has been substantial research on the relation between financial development and economic growth, both the finance and development literature lacks a comprehensive analysis of the effects of the banks privatization process on economic growth. Banks provide the raw material for a monetary production economy to work and grow (regardless of the technological form of money). The positive impact of finance on economic growth has received significant empirical support during the nineties, starting with the contribution by King and Levine (1993). Research showed also that counties with more developed banking systems and liquid capital markets have experienced the most rapid growth (Demirg-Kunt and Levine, 1996). Banks support increasing production by lending new deposit claims. Moreover, bank loan and deposit contracts are cost-efficient in environments with poor financial infrastructure, scarce information, and a high demand for safe and stable returns on money from savers: banks become the main financial players. (Biagio Bossone, The World Bank) In this study, the direction of correlation between the financial development and economic growth is investigated for Pakistan. The study is carried through the causality analyses, carrying out correlation/regressions and testing of the two hypotheses. The results of both hypothesis developed for the study are giving positive results, so the study leads to conclude that privatization of banks will increase competition, competition will improve efficiency and efficient banking sector will develop financial system and develop financial system of the country will contribute to economic growth. Financial sector has still a long way to go to catch up with other countries in the region with similar economic characteristics. However, recent structural changes, economic revival and stronger rupee if sustained will make it possible for Pakistan to substantially improve its position at least in relation to most of the countries with the same per capita income.

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CHAPTER 5 Privatization of Banks and its Impact on Employees

5.1 Introduction

Almost all developing countries including Pakistan have launched ambitious privatization programs with view to improve efficiency of the state-owned enterprises, convert the enterprises from state based economy to market based economy. Despite the extent of privatization worldwide, little attention has yet been paid in policy and the academic literature to its impact on labor (Oestmann, 1996). The focus of most studies is efficiency and profitability of the privatized business and, to lesser extent, the quality of the services it delivers (Hodge, 1996). A universal concern in this process the effect privatization has on labor. Major researchers, politicians and observers fear that privatization will cause major job losses because the new owners/managers will reduce the workforce for improvement of efficiency. On another side before divesting government cuts the work force to prepare for privatization. The opponents of privatization in developing countries are labor unions and enterprise work force, like labor unions of WAPDA and PTCL in Pakistan. They are most vocal and organized opponents and trying to delay or block the reform.

5.2 Does privatization Affect Labor?

Governments have traditionally feared the impact of privatization on employment. In some countries, the concern about massive layoffs has led governments to side-step privatization and tinker, without much success, with public enterprise reform. Increasingly, however, governments realize the futility of public enterprise reform and the opportunity costs of delaying privatization (in terms of unrealized gains from privatization to society as a whole). Governments that have taken employment concerns

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seriously have devised labor strategies, and have been able to mitigate the adverse consequences of privatization. The impact of privatization on employment is multifaceted and complex. (Antonio Estache et al.) The evidence is not clear on whether privatization has had a positive or negative effect. First, privatization has had a different impact on labor made redundant as a result of privatization, on labor retained within the privatized enterprise, and on labor markets. Second, the impact of privatization on employment can be measured both quantitatively (number of workers made unemployed, number of new jobs created, etc.) and qualitatively (working conditions, working hours, unionization, etc.), and the two indicators needindeed, rarely move in tandem. Third, the impact of privatization on employment has depended primarily on the companys initial labor conditions, which in many SOEs are: overstaffing, higher wages than comparable jobs in the private sector especially if the SOE does not face a hard budget constraint, generous non-wage benefits, rigid labor contracts or collective bargaining agreements, and high job security. Fourth, the welfare impact has varied depending on the measures that governments have taken, namely on whether they have put in place social safety nets. Fifth, the impact has varied depending on the privatization method (Table 2-6). Sixth, the impact of privatization on employment will vary from industry to industry and depending on the macroeconomic conditions. Finally, the population growth rate of the country will also effect on employment rate of the country. So, the complexity of the relationship between privatization and employment is such that there is no standard answer. (Sunita Kikeri,1998) It is frequently observed that employment is reduced with privatization (either in preparation for, or after) and the accompanying restructuring due to the overstaffing that typically exists in many SOEs. Three large-scale studies, however, have documented significant increases in employment. Galal et al. (1994) find that workers had a net welfare gain in ten out of twelve cases they examined, and that even laid-off workers were not worse off because of the social safety programs put in place (compensation packages, discounted shares, etc.) Boubakri and Cosset (1998) calculate an employment increase of no less than 10% in 57% of the privatized cases examined. On the other hand,

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examples of significant job losses abound. In Argentina, the privatization of the railway enterprise, which began in 1990, involved the loss of nearly 80,000 jobs in less than five years. But prior to privatization, the company was losing $ 800 million a year and receiving $ 1.3 billion a year in subsidies and the company moved less than 10% of the total traffic. In 1995, the subsidy had dropped to $ 250 million a year, productivity had increased ten times, and urban commuter rail rider-ship increased by 45%. In Mexico, half in the four years before privatization in 218 SOEs reduced the number of white and blue-collar employees. Employment implications of privatization are important issues that need to be addressed. The issue of employment can be looked at from both static and dynamic perspectives. From a static point of view, what happens to employment in the privatized unit is relevant. The dynamic aspect of employment is linked to the stated objective of increasing productivity. In the longer run, increased productivity and higher growth of the economy may create conditions for enhanced growth of employment. The economic environment and future growth potential of the economy, especially the private sector, needs to be examined in this context, and the long-term employment implications need to be analyzed? (Joshi,Gopal, ILO, SAAT. New Dalhi) The main reason of privatizing government enterprises in developing countries was to improve efficiency and decrease operating cost. The main cause of higher operating cost was political appointment, employing too many peoples more then requirement of enterprises. State owned enterprises were free and protected from competition. Peoples were appointed with higher wages and benefits that were higher then their private sector counterparts. These decisions led to low productivity and higher operating cost of state owned enterprises, in turn have contributed to inefficiency and financial losses. To attain the objectives of privatization (improvement in efficiency and decreasing operating cost) it was necessary to restructure the work force before privatization by government and after privatization by private owner. This restructuring will lead to reduction in labor force. At the same, it is believed that workers will gain from privatization, because of new investments that will create opportunities of new jobs and better terms and conditions of services.

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5.3 Characteristics of Labor Market in Pakistan.

Pakistan is developing country with unique features of government. Changes in governments are amazing story. A fluent change in government causes fluent changes in policies. Political governments are in favor of appointment of the peoples having political influence with the party, while military governments having no political agenda are in favor of strengthening enterprises not party.

5.3.1 Overstaffing State enterprises in developing countries including Pakistan were used as vehicles for job creation and political patronage. Protection from competition, lack of hard budget constraints, and security of tenure of public sector positions have led to chronic overstaffing or larger labor forces then is efficient. In India Pakistan and turkey, public enterprises were estimated to be overstaffed by nearly 35% in the early 1990. (Banerji and sabot, 1994). Overstaffing is most pervasive in enterprises that have operated monopolies with heavy government subsidies and other form of protection. Overstaffing increases operating cost of the banks that will effect net income and return to owners. Overstaffing was not only a problem of the banking sector but also rampant in other infrastructure sectors as well at both the national and municipal levels. Power utilities in many countries as well as in India and Pakistan, are severely overstaffed, with fewer then 50 customer per employee (compared with more then 200 in countries, such as Chile, Indonesia and south Africa). (World Bank 1996b)

5.3.2 Generous Pay and benefits The second important problem of State owned enterprises were payment of generous pay and benefits. In the absence of hard budget constraints, many state enterprises tend to

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reward workers well often too well. These huge payments have been eroding as a result of fiscal pressure. The banking sector of Pakistan was not safe from this practice. Un relevant peoples were appointed in banking sector with huge package on political basis that would impact bank profitability and efficiency negatively. In the absence of wider social safety nets, state enterprises in many countries also provide, a great expense, services such as housing, health care, education, and transportation. In 1980s these nonwage benefits were equivalent to 20% of wages in Africa, 20-35 percent in Asia, and 2437 percent in Latin America (Banerji and sabot 1994). Among sample of 361 Mexican state enterprises privatized between November 1983 and June 1992, fringe benefits in many companies tripled the wage bill (Lopez-de-Silanes 1996).

5.3.3 Labor Union Influence Rigid labor contracts or collective bargaining agreements at the enterprise level also contribute to low efficiency/productivity and high costs. A high job security in public sector enterprises, such contracts often place restriction on the right of employers to hire and fire, allocate work, and subcontract activities to non-union parties. These problems contribute not only to increased costs of doing business but also to high rates of absenteeism and moonlighting. On the basis of above-mentioned distortions in state enterprises labor markets, many observers fear that privatization will have a negative effect.

5.4 Privatizations employment impact: Initial Conditions Matter Many observers fear that privatization will have a negative effect on labor as governments prepare enterprises for sale and as new investors strive to raise productivity. What does the evidence show? Labor force reductions have often accompanied the privatization and exposure to competition of large and inefficient firms. But many enterprises, particularly those already operating in competitive markets, have been sold with their labor force intact. Moreover, privatization has often created new jobs as a

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result of new investments and dynamic expansion. While there are little data on what has happened to workers retrenched during privatization, because data assessing the effects privatization has on labor are hard to find and often poor in quality. The data do not distinguish the labor effects of privatization from those of overall economic reform programs. Moreover, they do not capture short-term effects of privatization relative to its long-term effects, since many governments have downsized labor well before privatization or imposed employment guarantees on newly privatized enterprises that have affected employment only down the line. Tracer studies of laid off workers are generally not available. However, employees who retained their jobs with privatized firms gained by better terms and conditions of service and employee shares.

5.5 Labor force reductions

In general, privatization has had a minimal effect on employment in countries that carried out labor reforms well before privatization. Chile, for example, began extensive labor market reforms in the early 1970s by rationalizing state enterprise employment and wages and changing labor market regulations regarding the hiring and firing workers. These reforms led to significant employment reductions by the early 1980s in both public and private firms. As a result the second round of privatization that began in 1985 and involved larger firms in sectors such as telecommunications and electricity resulted in no layoffs (Hachette and Luders 1993). In fact, employment in these firms increased by 10 percent as a result of overall improvements in the economy but also of the new investments that accompanied privatization. Privatization has also had a minimal effect on workers in competitive enterprises. Ghana, Mexico, Morocco, Pakistan and Tunisia are among many countries that have been able to sell such enterprises with their labor force more or less intact. Prior exposure to competitive pressures had resulted in relatively efficient staffing levels at the time of privatization and private buyers were willing to take on modest amounts of surplus workers who could be absorbed by new investments and dynamic expansion. However, large employment reductions have often accompanied the privatization of state enterprises that were, in the past, heavily subsidized and protected from competition. In

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steel, railways, and energy enterprises, overstaffing often has led to employment reductions before privatization as governments prepare the companies for sale, and after as privatized companies continue to shed labor.

The following has manifested effects of privatization in South Asia:

Worker redundancy Retrenchment of workers Stagnation of employment in organized sector Growing Casualization of labor

Redundancy resulting from privatization in South Asia PSE Employment Bangladesh India Nepal Pakistan Sri lanka 240 thousand 9.8 million 46.7 thousand 34.6 thousand 120 thousand Redundancy 25% 23%a 60% 63% a 53% b Retrenchment Costs Tk 7 billion Rs. 48092 billion Rs. 9914 million b Rs. 3559 million Up to 53 months salary a: voluntary retirement b. ILO estimates in 1992 for a scenario of 50% redundancy Source: Gopal Joshi , overview of privatization in South Asia

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Bid Values and Payments on Golden Handshake of Selected Industries in Pakistan Table 5.1

Average and Compound Growth Rates of GDP, Investment and Employment Table 5.2

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Tables were taken from privatization in Pakistan (A.R kamal, 1996) is showing the total lay off in the selected industries due to privatization. The tables show that 63.335% of the total employees are separated from services in the selected industries after privatization. The data about two bank is not given in the tables, however, the average compound growth rate of employment is showing increase for post privatization period as compared to pre privatization period of selected industries of Pakistan.

5.6 New Jobs Creation

Finally, while privatization has resulted in employment cuts, it also has created new jobs at the enterprise level (including in enterprises where labor reductions occurred before or during privatization) and at the sartorial level. Jobs are created when private operators used assets more productively and made new capital investments that might not have been made in the absence of privatization. Several studies support this view: A comparative study of the pre- and post-privatization performance of sixty-one companies in eighteen countries (six developing and twelve industrial) sold through public share offerings showed that almost two-thirds of the firms increased employment after privatization, by an average of 6 percent (Megginson, Nash, and van Randenborgh 1996). A study of seventy-nine newly privatized firms in twenty-one developing countries (including the most active privatizers) found employment increases of 10 percent for 60 percent of the sample firms; privatized firms newly exposed to competition were more likely to reduce employment (Boubakri and Cosset 1996).

A 1994 study examining the costs and benefits of privatization for different groups in society (including workers) in twelve enterprises in Chile, Malaysia, Mexico, and the United Kingdom found that workers gained in ten of the twelve cases through the retention and expansion of jobs. Equally important, the study found that even laid off workers were better-off, or did not suffer a welfare loss,

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because the amount of severance pay they obtained was larger than the wages they lost during the time between losing their old job and finding a new one, and because of the allocation of valuable shares at discounted prices (Galal and others 1994).

5.7 Factors, which will determine the extent of that impact: 1. Change of employer 2. The extent to which privatization is associated with technological changes, organizational changes or management changes. 3. The extent and pace of organization in whole economy. 4. Changes in the countrys legal frame work concurrent with privatization. 5. Changes in the nature of agreements collective bargaining and the culture of bargaining which invariably accompany privatization 6. Any specific agreements made between the Government, the new private company and trade unions. 7. The industry relations framework and the role and recognition of trade unions. 8. The level of competition with industry. 9. The nature of the new company. 5.8 Protection of the Interest of Workers Government signed an agreement with the All Pakistan State Enterprise Workers Action Committee on 15th October 1991 prior to launching the privatization program. The package had three components, viz. protection of workers, a scheme of golden handshake and the buy-out by the workers. These packages are given below:

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Package A (i) Workers are accorded all protection available to them under the Labour Laws. As a special measure no retrenchment of the workers is allowed during the first twelve months. (ii) 10 per cent of the shares of the privatized units are offered to the workers at a mutually agreed rate. (iii) Workers rendered surplus after the initial period of 12 Months, are entitled to the following benefits: (a) Priority in matters relating to the employment abroad. (b) Availability of easy credit for facilitating their self-employment. (c) A surplus pool of laid off workers was to be maintained by an agency appointed for the purpose and the Privatization Commission is endeavor to find jobs for such workers. Till such time, these workers are placed in employment; they are entitled to unemployment benefit at the rate of Rs. 1000 per month for a maximum period of two years. This benefit would be available to only those workers who have been rendered and remain unemployed involuntarily. (d) Suitable arrangements are to be made to provide training to surplus workers in new trades and occupations. (e) Grants are to be given for the marriage of their daughters. (f) Scholarships are to be provided for education of their children.

Package B (a) One months gratuity for each complete year of service is payable to the workers. Wherever this gratuity is non-existent or less than one month, the gratuity is assumed to be of one month. (b) Four months last drawn basic salary for each year of service will be paid in addition under the arrangements of the Privatization Commission.

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(c) All dues are paid only after the sale of units. However, all possible measures are adopted to settle the dues before handing-over of the units. (d) List of workers opting for golden handshake is to be provided by the respective CBAs. (e) All those including seasonal regular workers, who wish to avail the facility have their option before the sale agreement is signed.

Package C (1) In case of employee buyout, negotiations are facilitated in consultation with the Supreme Council of All Pakistan State Enterprises Workers Action Committee. (2) Workers are provided all opportunities to purchase a unit if they make a bid. They also have a right of negotiations on the highest bid. (3) All bids made by the workers have to be competitive and in accordance with the bid documents. (4) Workers are given concessions through negotiations if they are declared successful bidders. (5) Wherever gratuity fund is maintained as a trust, the funds can be used for investments as per rules. (6) The savings in the Provident funds can also be utilized for bidding purposes subject to Government rules and Regulations. (7) A management plan (which should include a financial plan) is submitted by the workers for any bid they make for a unit. (8) Any unit owned by the Federal Government in FATA will avail the same facilities as available to remaining units of state owned enterprises. (9) The facility of group insurance for workers who opt for golden handshake is available for continuation provided he subscribes from his own resources. I have collected the data about numbers of employees, numbers of branches and total operating expenses of two banks for pre and post privatization period. I have measured

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the impact of privatization on employment quantitatively (number of workers made unemployed, number of new jobs created, etc.) and qualitatively (working conditions, working hours and salaries etc.)

Table 5.3

Numbers of Employees Before and After Privatization

Muslim Commercial Bank Limited Before privatization after privatization Years Numbers of Years Numbers of employees employees 1986 1987 1988 1989 1990 12817 12885 12685 12890 12904 1997 1998 1999 2000 2001 13660 12858 12557 12133 11614

Figure 5.1 Number of employees for MCB pre & post privatization periods

14000 13500 13000 12500 12000 11500 11000 10500 1 2 3 4 5

Numbers of employees pre privatization Numbers of employees post privatization

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Table 5.4

Numbers of Branches Muslim Commercial Bank Limited Before privatization After privatization Years Numbers of branches 1986 1987 1988 1989 1990 1263 1265 1271 1270 1283 1997 1998 1999 2000 2001 Years Numbers of branches 1320 1216 1215 1210 1061

Figure 5.2 Number of Branches for MCB before and after privatization
1400 1200 1000 800 600 400 200 0 1 2 3 4 5

Numbers of branches Numbers of branches

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Table 5.5

Annual Operating Cost per Employee Before and After Privatization of MCB Before privatization After privatization Operating cost per employee 74271 78718 86664 108266 123749 Year T. Operating cost 1997 6488460000 1998 1999 2000 2001 7325059000 7104200000 7195383000 7371770000 Op. cost per employee 474994 569688 565756 593042 634731

Years T. Operating cost 1987 951934299 1988 1989 1990 1991 1014285192 1117094854 1395556135 1596859325

Source: Extracted from annual reports.

Figure 5.3 Operating Cost Before and After Privatization MCB

8000000000 6000000000 4000000000 2000000000 0 1 2 3 4 5
T. Operating cost before privatization Operating cost per employee before privatization T. Operating cost after privatization Op. cost per employee after

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Table. 5.6

Numbers of Employees Before and After Privatization of Allied Bank of Pakistan Before privatization after privatization Years Numbers of Years Numbers of employees employees 1986 6875 1997 NA ** 1987 7000 1998 1988 7125 1999 1989 7400 1990 7525 Source: Extracted from Annual Reports.

** ABL was transferred to the management group of the workers employed in the bank so there is no reduction in the employment.

Table. 5.7

Number of Branches of Allied bank of Pakistan limited Allied bank of Pakistan Before Privatization After Privatization Years Number of branches Years Number of branches 1986 666 1997 1987 691 1998 929 1988 693 1999 929 1989 711 1990 747 Source: Extracted from Annual Reports.

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Table 5. 8 Annual Operating Cost per Employee Before and After privatization of ABL Before privatization After privatization Years T. Operating cost 971338511 1126079280 1254961428 1524540158 Operating cost per employee 141285 160868 176134 206018 Year T. Operating cost 3696699000 3396440000 3719758000 Op. cost per employee * 491255 451354 494320

1986 1987 1988 1989

1997 1998 1999

1982658297 263476 1990 Source: Calculated from Annual reports of ABL

*The numbers of employees after privatization is not available. We have assumed the

numbers of 1990 to calculate operating cost per employee for post privatization of the bank.

Figure 5.4

Operating Cost of ABL Before and After Privatization before cost

4000000000 3000000000 2000000000 1000000000 0 1 2 3 4 5

T. Operating privatization Operating cost per employee before privatization T. Operating cost after privatization Op. cost per employee

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Table 5.9

Structure of Banking Sector for Pre and Post Privatization Period After privatization
Average State owned 8529 -NA NA

Before privatization
Banks State owned Private Foreign Total No. 7 -17 24 No. Of employees 59706 -NA NA

4 20 13 3 40

Private Foreign Specialized Total

Source: Banking supervision department State Bank Of Pakistan (march, 2004)

Figure 5.5

State owned

Number of Banks before privatizationand after privatization Foreign Foreign Total

45 40 35 30 25 20 15 10 5 0

Banks after privatization

Banks before privatizati on No. 7 -

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5.9 Findings Total number of employees in MCB decreased after privatization is 290. In 1990 the total number of employees were 12904 while in 2001 the total numbers of employees are 11614. This shows slight decrease in number of employees, which 2.25% of total. The data also shows that after privatization the numbers of employees were increased from 12904 in 1990 to 13660 in 1997, showing increase of 756 as a 5.86% of total. While the Number of employees in ABL before privatization were 7525 but data after privatization is not available. One thing, which is most important to mentioned here is methods of privatization of both banks are different. The impact has varied depending on the privatization method. ABL is given to Management, so it is hoped that there will be no reduction in numbers of employees except routine retirement etc. The numbers of branches of MCB before privatization was 1283 in 1990 while the number of branches are 1016 in 2001, showing decrease of 222 branches. Privatization needs reform and decreases in number of branches are because of closing non-profitable branches of the bank. The data also shows that numbers of branches were increased after privatization (37) in 1997 but later on it were decreased. The numbers of branches of ABL before privatization 1990 were 747 while after privatization the total numbers of branches are 929 in 1999, which shows increase of 182 branches that is 24.364% of total after privatization of the bank. Increase in numbers of branches will need to hire services of personnels so it can be estimated that there is chances of increase instead of decrease in numbers of employees. One of the objectives of privatization of public sector banks was to decrease operating cost. The data of MCB shows increase in operating cost per employee instead of decrease in number of branches and number of employees. The positive aspect of this increase in operating cost per employee is indicating increase in employees benefits. We cannot

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ignore the other causes of increase like inflation, increase in salaries for appointment of well skilled personnel etc. The operating cost in ABL is also showing increase. No doubt the number of branches after privatization are increased 24.364% of total branches that will need further appointments and hiring of personnels for operating of the branches. The impact of privatization of banks on employees is more severe during preparation for privatization then after privatization. In order to reduce surplus staff in the nationalized commercial banks voluntary separation packages were offered to employees. This resulted in the down sizing of the work force of three big NCBs (HBL, NBL and UBL) by 11101 staffers out of 39277 which is 28.26% of total and also as a part of down sizing exercise 1646 branches of NCBs were closed.

5.10 Conclusion There has no labor shading in the two privatized banks. The number of employees in MCB is showing slight decrease of 2.255 % of total employees. This may be because of retirement etc. so ABL is concerned the exact data about employees for post privatization period is not available but numbers of branches are increased and it is hoped that there will no negative impact on numbers of employees. Operating cost per employee is showing increase in both banks, it indicates the sharp increase in wage rates in banking sector. We have also observed that the cause of higher operating cost is that numbers of employees reduced are field force while the upper management is still more then requirement and getting huge amount of benefits. I have also observed that the maximum employees took gold handshake are readjusted in the new private banks. In 1990 the total number of banks in Pakistan was 24 where 7 banks were state owned and 17 were foreign banks, while in 2004 the total numbers of the banks in Pakistan is 40, that include 4 state owned banks, 20 domestic private banks and 13 foreign banks and 3 specialized banks. The average employees before privatization in the state owned banks were 8529 while there was no private bank The net increase in numbers of banks are 16 and using mean as new employment in the sector the banking sector can adjust more then one lack. But total

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decrease in state owned banks are approx. 12000 after or during preparation for privatization. While some privatizations will generate net employment as a result of expanding production or services, employment in many privatized entities may decrease after privatization. This is because state owned enterprises often have many more employees than needed for efficient operation of the company. Many of the employees perform little or no work and/or have low productivity. This implies that either taxpayers end up subsidizing their salaries or consumers pay for it through higher prices. The extra amounts paid by taxpayers or consumers leaves less money in the hands of people who might otherwise spend it in a way that promotes productive employment. In sum, the evidence shows a wide range of experiences with respect to privatizations effect on workers. Privatization can bring significant benefits to workers in enterprises operating in competitive markets where overstaffing is limited and where new owners are willing to maintain some excess staff to keep the political and social peace. More important, privatization can bring benefits to other workers as new jobs are created with new investments and dynamic expansion. Still, large employment losses can occur as inefficient, insulated state enterprises are liquidated or privatized, and as privatized firms face increasing competition. The more governments move into privatizing such firms, and the greater the exposure to competition, the larger those losses are likely to be. The privatization program as a whole, by injecting new investment, introducing better management, improving competitiveness, and leaving more money in the hands of the public, is likely to result in increased employment opportunities. At the same time, laidoff workers are often given generous severance packages that can be used to start business or obtain training to help them prepare for a new job. So I can conclude that privatization of bank has no negative impact on employees but it will create new jobs.

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CHAPTER 6 Privatization of Banks and Its Impact on Customers 6.1. Introduction

In the operation of a bank, there is unique relationship between banks and customers. Banks are borrower from customers at one place (pulling savings) and banks are lenders to customers at second place (providing loans, advances and credits). This borrowers and lenders relation is very important and need confidence on each other. The success of commercial banks totally depends on satisfaction of customers, if customers are satisfied they will use the products and services of the banks and banks can generate revenue/profit for the owners. The financial sector witnessed significant changes in terms of introduction of new services, expansion in existing services and changes in the regulatory framework. During the last few years, the banking sector expanded its menu of services aggressively by introducing new products. In the area of consumer financing, the banks are now competing with each other aggressively in contrast with an almost absence of these activities in the past. Banks have also been revamping their existing services of deposit taking and lending by introducing new instruments/schemes tailored according to the business needs of customers. Encouragingly, these changes are being made to specifically target the small and the medium size savers or borrowers. Consequently, lending to the small and medium enterprises, which had been a neglected area in the past, has now reemerged as a strong potential investment avenue.

6.2. Characteristics of Commercial Banks in Pakistan Despite the rigorous reforms of the financial sector during the 1990s, there was a dearth of financial services offered by the financial institutions in the country. Banks and the nonbank financial institutions were largely involved only in the provision of traditional services like deposit mobilization and credit extension mainly for working capital or project

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financing needs of industry. Services like personal financing, credit cards or ATM facility were negligible and there was no concept of online banking, phone banking or even housing finance by the banks. The situation, however, started turning around in the 2000s when significant progress was made in improving the health and soundness of the financial sector.

6.3. Customers Problems 1. Customers were needs to keep some cash in homes for emergency, because of working hours of banks in Pakistan. Peoples having money in their accounts were unable to withdraw from bank after 12 oclock of afternoon. This was one of the most important drawbacks of banking services and was caused the low rate of mobilization of savings. 2. The second important problem of banking sector in Pakistan was no safe products and services for fast transfer of money. Carrying huge amount in ship of cash had become the base for looting burglary etc. 3. No proper facilities for submission of utility bills at the end and start of months. Making of long queue to wait for own term was another problem facing by customers, and problem of law and order for local authorities. 4. Informations about products and services were not for all. The small deposit holders were not aware to get benefits from bank products and services. 5. Loans, advances and credits were only for big fishes on the basis of their political backgrounds or something else, but not for all customers. 6. No use of modern technology in banking sector was also cause of dissatisfaction of customers.

6.4. Challenges faced by Commercial Banking in Pakistan. There is a mini revolution in the financial sector of the economy in Pakistan. The liberalization of exchange control, large scale privatization of state enterprises, opening of new banks in the private sector, deregulation of credit controls, conversion to Islamic

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banking etc., etc. have brought about radical changes in the banking sector. The banks are rapidly equipping themselves for the new role to be played in meeting the challenges faced by commercial banking. The main competition challenges faced by commercial Banking in Pakistan are as under: 1. Change in Market Needs. Due to privatization of state owned enterprises, deregulation environment, free capital flow in and out of Pakistan, the banks are now to focus greater attention on meeting the market needs of the customers. The banks that solve the customers problems for enlarging sale of the product will receive higher reward. The traditional role of providing trade finance only is now relegated to the background. The banks which can provide speedy, accurate and

2. Service to Customers.

standard services in the delivery of products, loans etc. to the customers will be a success. The others will be chipped away.

3. Regulatory Challenges. The bank shall have to work within a regulatory framework that protects the interest of the depositors and ensure the provision of capital to the customers. 4. Consumer Banking. The banks do not adequately finance the basic needs of the consumers such as housing, transportation, and other durable. There is a challenge to banking sector as to how the finance could be provided to the consumers so that they could also benefit from the advances in technology and banking. 5. Challenge to New Banks in Private Sector. The new banks in the private sector will have to develop a sound funding base, attracting high quality management, providing high quality services to the customers to meet the new challenges in the banking sector.

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6.5. Emergence of New Products and Services The privatization of public sector financial institutions, relaxation in the licensing and regulatory environment for micro and rural credit institutions, mandatory requirements for banks to get themselves evaluated by credit rating agencies, measures to improve corporate governance, removal of restrictions on consumer financing by nationalized banks, incentives to provide mortgage finance, improvement in the legal framework for defaulted loans recovery, changes in the prudential regulations enabling banks to expand their scope of lending and customer network, reduction in the corporate tax rates on banks, mandating the banks to join ATM networks and the initiation of the development of Real Time Gross Settlement (RTGS) system all helped in bringing about a sea change in the financial services offered by various financial institutions. Significant progress was made during 2001 and 2002 in terms of expansion of micro finance activities, emergence of new financial products and services, automation of retail banking transactions, modernization of payment system and Islamization of financial services. Financial services commitments under General Agreement on Trade and Services (GATS) under WTO have also impacted the financial sector in recent past. Financial services landscape of future will also be influenced by GATS.

6.5.1. Consumer Financing Consumer financing means any financing allowed to individuals for meeting their personal, family or household needs. Consumer financing is not a new idea, this avenue of lending was almost entirely ignored by the banks and only the non-bank financial institutions had been active in extending such credits. This was due to the fact that banks were reluctant to embark on such activities owing to the longer tenures involved. It was only after 2001, when banks were flushed with liquidity that the interest in such lending arose among banks.

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At the moment Consumer financing is being provided by banks through credit cards, auto loans, housing finance and personal loans for the payment of goods, services and expenses. Banks are required to extend such loans within the broad parameters set by the SBP.

6.5.2.Consumer Financing Products

Credit cards Auto Loans Housing Finance ATM Electronic Banking etc. Table 6.1. Products Numbers of Credit Cards Number of On Line branches Number of ATM Number of ATM Transactions (000) Value of Transactions (in Million) Trends in Auto Loans (in Million) 12507 0.9 22108 3.5 37786 4.1 28052 N.A Details of Consumers, Products and Services in Pakistan. 2000 2001 2002 370000 777 399 9319 2003March 400000 994 445 6450

220000 295000 322 206 3624 450 259 5924

Source: Banking System review State bank of Pakistan, 2002.

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Figure 6.1 Numbers of Credit Cards

400000 200000 0
Numbers of Credit Cards

Figure 6.2 Number of On Line branches 1000 500 Number of On Line branches 0

Figure 6.3 Number of ATM

600 400 200 0 2000 2002

Number of ATM

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Table 6.2.

Distribution of ATM (in Numbers) 2000 2001 66 146 103 2002 89 245 151 2003 March 100 278 155

Public Sector Commercial Banks Domestic Private banks Muslim Commercial Bank (MCB) Others Foreign Banks Total Share of MCB in %

48 113 75

38 45 206 36.4

43 47 259 39.8

94 65 399 37.8

123 67 445 N.A

Source: Banking System review State bank of Pakistan, 2002. The data clearly indicates the interest of the peoples in uses of new products and services of banking sector in Pakistan. But still the number of users is very low when we compare it with total numbers of accounts for the mentioned periods. The positive point is the upward trend of the users and we hope with the passage of the time and awareness of the customers that ratio will further increased. However, the contribution of MCB in the provision of new products and services as a privatized bank is very encouraging. The data about other bank (ABL) selected as a case study is not available to separately to use in comparison.

6.6. Impact on Customers Researcher has prepared the questioner to collect the primary data in three district of NWFP i.e. Dera Ismail khan, Peshawar and Mardan. I failed to use questioner as a data

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collection tool because maximum customers were less educated and unable to fill the questioner properly, so I have carried semi structure interview to collect data about customers views for pre and post privatization periods of banks. A series of questions were designed to examine the satisfaction of bank customers with bank services, confidence on banking sector, use and knowledge of new products etc., etc. I have interviewed 30 customers of each bank in each district and table of their response to different questions is as under: Table.6.3 Questions Customers knowledge about Privatization of Banks Positive Extremely Negative positive 1. Do you know what is 3% 2% 70% Extremely negative 25%

privatization? 2. Do you feel any change in bank 7% services? 3. Do you know about new 10% products of the banks? 4. Do you have confidence on 20% banks? 15% 45% 20% 5% 50% 35% 5% 65% 28%

Figure 6.4 C u stom ers know ledge about P rivatization of 1. D o you know w hat is privatization? B an ks
80% 60% 40% 20% 0% P ositive E xtrem ely positive N eg ative E xtrem ely neg ative 2. D o you feel any chang e in bank services? 3. D o you know about new products of the banks? 4. D o you have confidence on banks?

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Peoples of NWFP have unique culture that is not easy to change with education. Religious factor is also considered in bank transactions. During survey I have observed that maximum customers with enough education do not know what is privatization. Only 5% customers maximum University teachers, doctors and engineers or well-educated businessmen were known to concept of privatization. Only 2% of total were well aware about the privatization process. 65% did not know this term, while 28% heard the term but did not know the real concept. So for changes in services are concerned response of 12% was positive or extremely positive. 7% of were of the views that after privatization, the services of these two banks are improved but unable to notify. 5% were able to notify the change in services. I have also observed that 15% respondents are aware about the new products introduced by these two banks after privatization. Confidence on banks ratio is still very low in NWFP because of the problems already explained in this chapter (cultural problem). The survey results also confirm the continued lack of confidence in the banking system as a result of the unorthodox policies of the government in the 1999 and onward. The majority of the respondents indicated that the lack of banking confidentiality and fear of government probes of individual bank accounts serve as a deterrent to deposits, especially large deposits. The amazing thing we have noted in the survey is that 65% of total are still look like allergic from banking system while 25% have shown confidence on banking system in Pakistan. One positive impact is the disappearance of the long waiting time at some of the larger banks that have introduced ATMs and computers. Some depositors still complain about delays at banks, especially those banks that are not yet computerized.

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Table 6.4 Changes in Bank Employees Behavior Questions Behavior with customers Cooperation with customers Dealing with customers Provision of information Good 30% 27% 24% 9% Very good 25% 14% 10% 6% Bad 23% 29% 36% 45% Very bad 22% 30% 30% 40%

Figure 6.5 Employees Behavior with Customers 50% 40% 30% 20% 10% 0% Good Very good Bad Very bad
Behavior with customers Cooperation with customers Dealing with customers Provision of information

The survey reveals that employees behavior with customers is improved because of change in ownership and structure of their services that is 55% where 30% is good and 25% is very good, cooperation and dealing with customers is not bad but percentage of information is very low. This shows that low percentage of customers knowledge is because of non-availability of appropriate information.

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Table 6.5

Customers Awareness About the Banks New Products Positive Extremely Positive 2% 3% 5% 0% Negative 80% 65% 60% 0% Extremely Negative 15% 27% 28% 99%

ATM On line Account Credit cards EFTPOS

3% 5% 7% 1%

Figure 6.6 Customers Awareness About Bank New Products

120% 100% 80% 60% 40% 20% 0% Positive Extremely Positive Negative Extremely Negative

ATM On line Account Credit cards EFTPOS

I have found during the survey that maximum customers in these three districts (Dera Ismail khan, Mardan and Peshawar) used as population do not know the new products created by these two banks after privatization. Only 5% of the total know about the ATM stand for, while 95% do not know what is ATM and what that stands for? I have also observed that only 8% of the customers know about on line account facility of the banks and 92% have no knowledge of on line account. Only 12% in these three districts have knowledge of credit cards and 88% responded in negative. So for EFTPOS is concerned only 1% has give answer in positive while 99% dont know what is EFTPOS?

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Table 6.6 Customers Views About Operation of New Products and Services Positive ATM On line account Credit cards 2% 4% 5% Extremely positive 5% 5% 6% Negative Extremely Negative 33% 60% 51% 40% 39% 49%

Figure 6.7 Customers Views About Operation of New Products

Positive Extremely positive Negative Extremely Negative

The study also found that maximum customers did not know how to operate the new products of the banks. The astonishing thing I have noted during interviewing the well qualified customers like teachers including university teachers and doctors, engineers etc. their response was totally negative about the operation of ATM, however they were aware about uses of on line account and credit cards. The percentage of account holders who can operate these new products are very low, just 5% can operate the ATM most them were foreign returned and 9% can operate on line account and 11% can operate credit cards. In terms of banking hours, the majority (76.2%) of the respondents in a survey indicated their dissatisfaction with the current banking hours. Sixty-five percent (65%) of the respondents indicated their preference for longer hours from 8.30 am to 4.00 p.m. The

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study also found that maximum bank employees are not able to operate the new products and technologies and need proper training. 6.7 Conclusion The new economics of information, together with the advent of e- banking, deregulation, privatization, convergence, and consolidation are reshaping the banking industry. Autonomy can help you develop a formidable online offering to satisfy and exceed consumers raised expectations. Around the world, banks are facing new challenges in their battle to compete successfully. These challenges are being driven by three interrelated factors: changing customer expectations, which has led to the "reinvention" of retailing; innovations in technology that have permitted structural bypass, and an evolution of regulatory policies that have led to enterprise realignment. As a result, bank management today is facing an entirely new set of strategic issues:

Keeping shareholders happy Customer loyalty and profitability Distribution strategy Flexible cost structure New structures for growth Risk management Keeping pace with change

Financial services providers are poised to profit from new e-business opportunities and new legal freedom to combine industry segments-such as banking and insurance-but they face the challenge of opening backend systems to broader audiences than ever before. With a phenomenal growth of electronic transactions internationally, it is crucial for Pakistan to develop its e-commerce infrastructure to be the part of global economy. But due to the capital-intensive nature of such operations, Pakistani banks have been lagging behind in offering e-commerce services in the past. It is only during last couple of years, when the e-banking witnessed some growth in the country. Banks are now investing

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heavily to bring their operations on modern technological grounds. To facilitate their customers, each bank is now maintaining its website to provide a comprehensive information regarding the services that they offer. Wide-ranging services like Automated Teller Machines, credit cards, debit cards and phone banking are now common among most of the banks. We will recommend that just creation of new products are not enough but customers awareness is more important. In the country like Pakistan, bank management should develop comprehensive plan for educating customers and employees of the banking sector about the new products and services. We conclude that the theory, privatization will increase competition and competition will give birth to new products, is proved in case of Pakistani banking sector. A lot of new products and services are introduced after the privatization and reform in banking industry of Pakistan. The introduction of computers at bank branches and the installation of ATMs seemed to set in motion a revolution in Pakistans banking system. So as to ensure that financial assistance is rendered to the potential borrowers, it is necessary for a bank to develop adequate level of awareness about the various types of schemes and facilities and their utility among the people. Such awareness can be developed in various ways such as educating borrowers / potential borrowers through formal and informal interactions. The bank branches are required to hold customer meetings once a month to generate awareness and interaction. In addition, the branch personnel are expected to move in field to contact existing and potential borrowers to know their requirements and expectations from the Bank to enable the banker to tailor the schemes to suit the requirements of the customers within the overall framework and guidelines of the Bank.

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Chapter 7 Regulatory Environment for Privatization of Banks

7.1. Introduction Banking is sensitive industry. Unlike other corporate entities, the business of banking requires supervision and vigilance to ensure the safety and soundness of the system and also to protect the interest of the depositors. Ishrat Husain (2004). Commercial banks are also among the most tightly regulated economic institutions in modern economies. There are many justifications, including preventing contagious liquidity crisis, maintaining financial stability, protecting small depositors and investors, enhancing efficiency, and other social purposes (Herring and Santomero, 2000: Freixas and Rochet, 2001). Calomiris and White (1994) attribute banking regulation to the capture of the state by interest groups. Despite the tight regulations, banking crisis have been the sources of economic instability during the last two decades of the 20th century. inappropriate banking has attracted more criticisms (Caprio, 1998). The past history of banks in Pakistan cannot be ignored. The case of Mehran Bank is still on record. Financial institutions were opened in different nature and type, like cooperative societies, etc. with out any proper regulation and vigilance. Huge percentage of returned was offered to attract peoples to deposit their savings. After collection of huge amount they run away and the Government of Pakistan is still facing to solve this problem. Banks are key institutions for attracting savings, in the form of short-term deposits, and converting them into longer-term investments, in the form of loans. When private capital is genuinely at risk, bankers have strong incentives to gather information about the creditworthiness of potential borrowers, which they can then use to determine how, and on what
terms, credit is allocated. This ensures that investment is directed towards the most

As a result,

productive purposes and imposes a hard-budget constraint on firms. (World Bank, 1995). However, when political pressure distorts bankers' incentives, credit may be directed without due regard to commercial lending criteria. These pressures are likely to be especially
pronounced for state-owned banks. In theory, banks privatization might, therefore, have a large

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effect on financial sector performance and, in turn, on aggregate long-term growth.

(Demirguc-Kunt and Levine (1994)

7.2 Regulatory Reform Proper regulation for corporate governance of banks received immense importance in the aftermath of several episodes of banking crises in 1990s, some of which resulted into banking sector collapses. In an emerging economy like Pakistan, this issue becomes even more important. In view of rapidly developing market but slow pace of information dissemination, it is important to reduce the adverse selection and moral hazard problems that may arise due to new entrants in the business of banking. It is in this perspective that the State Bank of Pakistan issued some guidelines detailing the code of corporate governance of banks. Privatization of banks without proper regulation can create problems. For example, Chile privatized many public banks in the early 1970s as part of its privatization program. In 1982, the financial distress of the industrial conglomerates caused by high interest rates and currency devaluation meant that many firms were unable to service their loans. World Bank (1989) suggests that an inadequate regulatory framework allowed [the privatized banks] to be acquired by industrial groups, which used them to make excessive loans to group firms. (Stallings and Brock, 1993)

7.3 Pre- Privatization Activities Economic development does not take place in a vacuum. It requires an enabling environment, which includes a proper legal and regulatory framework. To prepare the public sector banks for privatization, following steps were taken in the Pakistani banking sector:

Amendment in Banks (Nationalization) Act 1974. This Act, under which the banking sector in the country was nationalized during the seventies, was amended in 1990, to pave the way for privatization of the nationalized commercial banks.

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2 Cabinet Committee on Privatization (CCOP) Created in 1991, the CCOP has operated continuously except for the period September 1998 to February 2000, when a Privatization Board of Pakistan headed by the Prime Minister replaced it. Presently, this Committee of the Cabinet is headed by the Minister for Finance and includes the Ministers for Privatization, Industries & Production, IT & Telecom, Petroleum, Water and Power, and Labor. It also includes the Deputy Chairman, Planning Commission. According to its terms of reference issued in February 2000, the CCOP is to: Formulate the Privatization Policy for approval of the Government/Cabinet Approve the State Owned Enterprises to be privatized on the recommendation of the Privatization Commission or otherwise Take policy decisions on inter-ministerial issues relating to the privatization process Review and monitor the progress of privatization Instruct the Privatization Commission to submit reports/information/data relating to the privatization process or any matter relating thereto Take policy decisions on matters pertaining to privatization, restructuring, deregulation, regulatory bodies and Privatization Fund Account Approve the Reference Price in respect of the State Owned Enterprises being privatized. Approve the successful bidders Consider and approve the recommendations of the Privatization Commission on any matter Assign any other task relating to Privatization to the Privatization Commission.

Abolition of the Pakistan Banking Council The Pakistan Banking Council, established subsequent to nationalization of the banking sector in the seventies, was abolished in 1997.

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Establishment of CIRC The Corporate and Industrial Restructuring Corporation (CIRC) was established in 2000 for acquiring Non-performing Loans of NCBs. Non-Performing Loans worth Rs. 47.4 billion have been transferred to CIRC at a discount so far for disposal.

5 Protection of Economic Reforms Act, 1992. The new Act was introduced for protection of economic reforms in the country. The main headings of the act are: II Act No. XII of 1992

AN ACT TO PROVIDE FOR FURTHERANCE AND PROTECTION OF ECONOMIC REFORMS WHEREAS it is necessary to create a liberal environment for savings and investments; and other matters relating thereto; AND WHEREAS a number of economic reforms have been introduced and are in the process of being introduced to achieve the aforesaid objectives; AND WHEREAS it is necessary to provide legal protection to these reforms in order to create confidence in the establishment and continuity of the liberal economic environment created thereby; It is hereby enacted as follows: 1. Short Title, Extent And Commencement (1). This Act, may be called the Protection of Economic Reforms Act, 1992. (2) It extends to the whole of Pakistan. (3) It shall come into force at once.

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2. Definitions In this Act, unless there is anything repugnant in the subject or context: (a) "Government" includes both the Federal Government and any Provincial-----------------------Government; (b)"economic reforms" means economic policies and programmes, laws and regulations announced, promulgated or implemented by the Government on and after the seventh day of November, 1990, relating to privatization of public sector enterprises, and nationalized banks, promotion of savings and - investments, introduction of fiscal incentives for industrialization and deregulation of investment, banking, finance, exchange and payments systems, holding and transfer of currencies; and (c) all other expressions used in this Ordinance shall have the meaning, respectively assigned to them under the relevant laws. 3. Act To Over-ride other Laws The provisions of this Act shall have effect notwithstanding anything contained in the Foreign Exchange Regulation Act, 1947 (VII of 1947), the Customs Act, 1969 (IV of 1969), the Income Tax Ordinance, 1979 (XXXI of 1979), or any other law for the time being in force. 4. Freedom to Bring, Holds, Sell And Take Out Foreign Currency All citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons shall be entitled and free to bring, hold, sell, transfer and take out foreign exchange within or out of Pakistan in any form and shall not be required to make a foreign currency declaration at any stage nor shall any one be questioned in regard to the same. 5.Immunities to Foreign Currency Accounts 1. All citizens of Pakistan resident in Pakistan or outside Pakistan who hold foreign currency accounts in Pakistan, and all other persons who hold such accounts, shall

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continue to enjoy immunity against any inquiry from the Income Tax Department or any other taxation authority as to the source of financing of the foreign currency accounts. 2 The balances in the foreign currency accounts and income there from shall continue to remain exempted from the levy of wealth-tax and income tax and compulsory deduction of Zakat at source. 3 The banks shall maintain complete secrecy in respect of transactions in the foreign currency accounts. 4 The State Bank of Pakistan or other banks shall not impose any restrictions on deposits in and withdrawals from the foreign currency accounts and restrictions if any shall stand withdrawn forthwith. 6. Protection of Fiscal Incentives for Setting-up of Industries The fiscal incentives for investment provided by the Government through the statutory orders listed in the Schedule or otherwise notified shall continue inforce for the terms specified therein and shall not be altered to the disadvantage of the investors. 7. Protection of Transfer of Ownership to Private Sector. The ownership, management and control of any banking, commercial, manufacturing or other company, establishment or enterprise transferred by the Government to any person under any law shall not again be compulsorily acquiredor taken over by the Government for any reason whatsoever. 8. Protection of Foreign and Pakistan Investment No foreign, industrial or commercial enterprise established or owned in any form by a foreign or Pakistani investor for private gain in accordance with law, and no investment in share or equity of any company, firm, or enterprise, and no commercial bank or

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financial institution established, owned or acquired by any foreign or Pakistani investor, shall be compulsorily acquired or taken over by the Government. 9. Secrecy of Banking Transaction Secrecy of bonafide banking transactions shall be strictly observed by all banks and financial institutions, by whosoever owned, controlled or managed. 10. Protection of Financial Obligation. All financial obligations incurred, including those under any instrument, or any financial and contractual commitment made by or on behalf of the Government shall continue to remain in force, and shall not be altered to the disadvantage of the beneficiaries. 11. Rules The Federal Government may make rules for carrying out the purposes of this Act.

6. Promulgation of Privatization Ordinance To further strengthen the privatization process, the government promulgated the Privatization Ordinance in 2000. The Ordinance strives to ensure that privatization is carried out in a fair and transparent manner. 7.4 State Bank of Pakistan (SBP) The State Bank of Pakistan in itself is a regulatory authority, monitoring banks and financial institutions. There is a separate department, Banking Policy and Regulation Department specific for this purpose. In 1991-92, the financial sector reforms were going on at a rapid speed. Privatization of the banking sector has been an important component of these reforms. It is motivated by the intention to increase the competitiveness and efficiency of the banking system. In 1992, SBP issued new cautious regulations to enhance the supervision and regulation of the banking system. The new guidelines include more strict limits on credit concentration and on conditional liabilities; rigid

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guidelines on the separation of bank ownership and management; tighter margin requirements on equity-based advances; and a strong system of classification and provisioning for non-performing assets. In addition, amendments were also made to the banks Nationalization Act of 1974 aimed at enhancing the administrative and advisory role of the Pakistan banking Council in commercial banking. In 1993, through an amendment in the State bank Act, 1956, the State bank of Pakistan has been given operational independence to conduct monetary policy and regulate and supervise the banking sector. Recently, an ordinance called Financial Institutions (Recovery of Finances) Ordinance 2001 has been promulgated. According to this ordinance a financial institution or the customer may fill a suit in the banking court, with regard the any default in the finances. (A.R. Kemal, et al, 2002)

7.5 Legislative Agenda for Economic Reforms For the implementation of economic reform program, the government has as a matter of policy, formulated an extensive legislative agenda cutting across the various sectors of economy, including the banking and financial sector.

7.5.1 Banking and Financial Sector Mindful of the magnitude of the defaulted loans, the Banking companies loan recovery law is being strengthened to facilitate the process of mortgage, foreclosure and expeditious settlement of banking disputes. Further more, a banking Law Review Commission has been formed to review all the banking laws and regulations with a view to updating, consolidating and rationalizing the same. Legal measure to build confidence, which had eroded after the freezing of foreign currency accounts, are also being introduced to prevent such occurrences in the future. Industrial finance is being revived through a restructuring of the banking and financial sectors, Priority will be given to the needs of small and medium industry with in export orientation. Efforts will be focused to promote small and medium industries, having high labor intensity.

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As a follow up of its poverty alleviation program, the Government has, through an enabling legislation, established a new bank for enhancing poor peoples access to credit. A new insurance law has been promulgated to provide for deregulated, competitive and safe environment for insurance business. A new law has also been framed to provide for easy mergers, acquisitions, take over and liquidation of public listed companies. Changes in monopoly control authority law are also under consideration. State Bank of Pakistan, during the last decade has implemented policies to reform the banking sector in Pakistan, as part of the overall financial sector reform package initiated in early 1990s. Although, slow in pace until recently, the reforms have been consistent and continuous. As a result of these reforms, the commercial banking industry in Pakistan has taken a new shape and is working on a new vision. Part of these reforms is also related to the issue of corporate governance of banks in Pakistan. Corporate governance is a new phenomenon not only in Pakistan but in general. The major reason of corporate governance is the recent episodes of banks failures in different parts of the world especially in the aftermath of the 1997 Asian financial crisis. The issue of corporate governance of banks in Pakistan received special attention because Pakistan embarked on measures of banking sector restructuring and privatization at the same time when deliberations were underway to devise some code of ethics for corporate governance of the financial and corporate sector including banks. A major step towards this was a joint project by the Securities and Exchange Commission of Pakistan and the UNDP (SECP-UNDP) in collaboration with the Economic Affairs Division (EAD) of the Ministry of Finance. The project was launched in August 2002 with the objective to design, develop and implement a Code of Corporate Governance. Though this project had some discussion on corporate governance for banks but its main focus was the corporate sector in Pakistan and issued measures to create stakeholder awareness, capacity building and networking with other emerging economies. To address the problems of banking sector, the State Bank of Pakistan (SBP) issued a Handbook of Corporate Governance in 2003. The objective of this handbook is to provide guidelines

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for Board of Directors, managers and shareholders. Most of the recommendations and guidelines stated in the handbook are directly drawn from the recommendations made by Basel Committee on corporate governance and OECD. These guidelines cover four important areas, namely, Board of Directors, Management, Financial Disclosure, and Auditors. It is to be noted that this is the only document available at this point. Some important features of this Handbook are highlighted here:

a. The Board of Directors Basel committee places major responsibility on the board of directors and senior bank management to fully understand the risk exposure. As such, it is recommended that the composition of the board of directors and senior management in a bank should include individuals who are highly skilled and experienced in determining the risk exposure given the size and nature of the banks activities and should be able to take certain steps if a need arise to reduce a high risk exposure. Regulators and supervisors have an important responsibility to determine the adequacy of the internal control measures including the responsibilities of the board of directors in dealing with organizational structure, accounting principles, checks and balances and safety of investment and compliance of abiding by the given laws and required disclosure. Another important part of the recommendations issued by different committees such as Basel and OECD deals with the Business ethics, specifically to make sure that the rights of shareholders stakeholders are well protected. Accordingly, these shareholders and stakeholders have a right to adequate and timely information and appropriate forms of participation in the decision making process of the bank.

Appoint of Board of Director Prior clearance of the SBP is needed for the appointment of BOD. The potential

nominee/appointee for the post of a Director should have substantial interest (no less than 20 per cent shares) and should be working in a management capacity for the bank. Anyone holding at least 10 per cent shares can become Director subject to SBPs

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approval.

SBP requires that the incumbent should also qualify the standard fit and A minimum of 5 years of senior business/management

proper test for appointment.

level experience for the post of directors while potential candidate for Presidents or CEO of banks need to have spent 15 years in banking career with a minimum of 3 years in senior level. These individuals should also have impeccable record in the their professional capacities, should not have been involved in any bank insolvency or should not be a defaulter of any kind and should not be a director in any other financial institutions creating a conflict of interest. The SBP may also ask any banking company to call a general meeting of the shareholders to elect a new director. Banking Companies Ordinance (BCO), 1962 and Companies Ordinance (CO), 1984 specify the procedure for the election of a director. According to the Companies Act, 1913 the SBP may also appoint no more than one person to be a director of a banking company. In either case, the total number of directors should not be less than seven and the tenure of a director is restricted to be no more than six consecutive years.

Responsibilities of the Board of Directors The responsibilities of the BOD are specified in the SBP code of corporate governance. Some important ones are highlighted here: The Board shall approve and monitor the objectives, strategies and overall business plans of the institution and will ensure that all activities are carried out prudently within the framework of existing laws and regulations. The Board shall clearly define the authorities and key responsibilities of both the Directors and the senior management without delegating its policymaking power to the management. The Board shall approve and ensure the implementation of all policies related to audit and internal management of risk and resources and will be responsible for the review and update of existing policies. The Board will ensure an effective Management information system to cater to the needs of changing market conditions.

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The Board should meet frequently (preferably on a monthly basis but at least quarterly), and the individuals directors should attend at least half of the meetings held in a financial year. The SBP requires that all Pakistani scheduled banks in Pakistan should not hold their ordinary BOD meetings outside the country. Holding such meeting abroad leads to wastage of resources without any benefit to depositors/customers.

The Board is required to prepare a formal summary of the proceedings of the general meetings and meeting of its directors and committee of directors for inspection duly signed by the chairman and makes it available for inspection by members free of charge. Under an amendment to the BCO, 1962, the SBP starting January 2000, required all banks incorporated in Pakistan to furnish copies of the minutes of the meeting of their respective BODs within seven days of the meeting to the Director, BPRD, SBP.

The activities of the Board should be transparent to the external auditors and supervisors to form a judgment on its working and decision-making performance. The Board will ensure that appropriate actions are taken, in consultation with the audit committee of the Board, to rectify any weaknesses and lack of controls with a copy of the letter submitted to the SBP for monitoring purposes.

Further Guidelines for the Functions of the Board of Directors The Companies Ordinance, 1984 also details the power of Directors which empowers the Director to make important decisions on investment and human resource management as well as capital expenditure. The SBP directive also require that member of the BOD of a banking company should not hold any more 5 per cent of the paid-up capital of the banking company in individual capacity or in the name of family members. The Directors should not appointed in the bank in any capacity, shall not be paid other than traveling and dialing allowances to attend meeting and no more than 25% of the total directors can be paid executives of the bank. In order to reduce the monopoly of the same family in a banking company, the SBP, in November 2001 issued a circular to restrict the number of directors on the board from the

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same family no more than 25% (as compared to 50% allowed earlier). The BCO, 1962 also restrict a person to be a director of two companies simultaneously. To reduce political influence, any Federal, or Provincial Minister or the Minister of State or a civil servant cannot be appointed as the director of the banking company. Under prudential regulation guidelines of the SBP, the banking is not allowed to make loans or advances to any of its directors, chief executive, individuals, or their family members or firms or companies which the banking company or any of its director is interested as partner holding more than 5 per cent of the share capital or make loans and advances on the guarantee of the above individuals. The banking company is also not allowed to make loans and advances against the security of its own share. The prudential regulation circular issued in 1992 also forbids banks to enter, without a prior approval of the SBP, into a lease, rent or sale/purchase agreement with their directors, officers, employees or any individual (or their family member) with ownership of 10 percent or more of the equity of the bank Whenever deemed necessary, the SBP has the authority to supersede the Board of directors and may continue to do so for period determined by the SBP. The SP guidelines also detail the procedure for the removal, retirement or prosecution of director(s) or chief executive officers. b. Management The appointment criterion of the Chief Executive Officer (CEO) is the same as the Director of the BOD. No prior approval of the SBP is required for such appointments. However, the banks are required to adhere to the SBPs guidelines containing the Fit and Proper Test for the appointment of key executives, especially very senior level officials non-compliance to which will result into punitive actions against the banking company. The key criterions of the Fit and Proper test include: The incumbent should have a track record of Honesty, integrity and reputation, not convicted of any criminal offence including fraud or financial crime. Should be competent and capable of fulfilling his/her duties, having adequate qualification and experience. Should not have been removed/dismissed from service in the capacity of an employee, director or chairman on account of financial crime or moral conduct.

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Should not be defaulter of payment(s) due to any financial institutions or tax office. Should not supervise more than one functional area that give rise to conflict of interest within the banking company and should not hold directorship of a company that is a client to the bank.

c. Financial Disclosure Under the BCO, 1962, all banking companies incorporated in Pakistan or foreign banks with branches in Pakistan are required to furnish a balance sheet and profit and loss account to the SBP at the end of the calendar year. The CO, 1984 requires that the directors shall attach a report with the balance sheet to report the state of the companys affairs, the details of dividend distribution, and details of any reserve accounts Disclose any material changes and commitments affecting the financial position of the company. Disclosure of any observations or negative remarks made in the auditors report. State details of holding of share, earning per share, reasons for incurring loss (if any) and any defaults (if any). Noncompliance to the above will result in to punitive actions by the relevant authorities.

d. Auditors Another principal of effective bank supervision is the effective internal audit. Internal audit helps to identify the problem areas and to avoid a major collapse. However, to have an effective internal audit, it is important that the bank should have sufficient resources and qualified and an appropriate methodology to undertake this task. Again, supervisors have to make sure that banks have an appropriate audit function and satisfy the above criterion. Reporting of these reports in an accurate and timely manner is essential for evaluation of the banks status and need for any necessary strategy. Supervisors have the authority to hold management responsible for the release of all such information and

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reports and that these reports are accurate and produced in a timely manner. Some recommendations from the SBPs handbook are stated here: Under CO, 1984, the banking company is required to appoint an auditor in its annual general meeting for a period of one year. The first auditor of a newly incorporated company should be appointed within 60 days of the incorporation of the company. All banking companies are required to appoint auditors from the panel of auditors maintained by the SBP. This panel consists of auditors who satisfy certain minimum criteria based on their qualification and experience. Any individual who is a director of the company or has any kind of employment with the company or any of his/her family member is employed by the company cannot be appointed as the auditor of the same company. Any individual or his/her family member who is appointed the external auditor is not allowed to hold, purchase, or sale shares of the company. The BCO, 1962 states that the balance sheet and profit and loss account prepared by the company shall be audited by the banking companys auditor. The auditor is required to furnish an audit report stating the authenticity of the information and extend of cooperation provided by the banking company while conducting the company audit. These will include verification of the sources of funds generated and investments made by the banking company during the audit period. The auditor shall adhere to the guidelines or any amendments to the guidelines issued by the SBP for the audit of the banking company. The auditors will furnish a special report to the Director, Banking Supervision Department (BSD) of the SBP and a copy to the concerned bank. (State Bank of Pakistan (2004), Draft Guidelines on Internal Controls, State Bank of Pakistan, Karachi.)

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Further General Developments on Corporate Governance The State Bank of Pakistan has recently issued Guidelines on Internal Controls further explaining the policies, plans and processes as affected by the decion-manking process of the BODs and senior management. As it is well established elsewhere and effective risk management is strongly influenced by effective internal control mechanism helps reduce the risk and probability of banking crisis. Hence, the SBP has put special emphasis to these guidelines for internal control as part of effective risk management. The system of internal controls includes financial, operational and compliance controls and risk management. The guidelines ensure efficiency and effectiveness of operations, reliability, completeness and timeliness of financial and management information and compliance with policies, procedures, regulations and laws. An important aspect of risk management is risk recognition and assessment as well as correcting deficiencies. Self-assessment requires certain level of expertise and experience. It is, therefore important that senior management and internal auditors of the banking industry are qualified to perform these tasks. In an emerging but rapidly developing financial system such as Pakistan, regulators can be very useful by organizing certain workshops to the senior management to understand the mechanism to fully understand and assess different categories of risk bank is expected to face in the changing market conditions. One can learn important lessons from the policies implemented by the Southeast and East Asian economies in the aftermath of the 1997 Asian financial crisis and under the new financial architecture. Organizing workshops and courses for senior banks management and sharing information dealing with a bank-specific problem are two important aspects of this new financial architecture. (State Bank of Pakistan (2003), Handbook of Corporate Governance) The existing Prudential Regulations in respect of various aspects of operations of commercial banks been reviewed in the light of the on-going process of changes in the financial sector. The introduction of new products and services were required new rules and regulations. The state bank of Pakistan as a prudential supervision authority made the following regulations about consumer financing.

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PART A DEFINITIONS 1. Bank means a banking company as defined in the Banking Companies Ordinance, 1962. 2. Borrower means an individual to whom a bank / DFI has allowed any consumer financing during the course of business. 3. Consumer Financing means any financing allowed to individuals for meeting their personal, family or household needs. The facilities categorized as Consumer Financing are given as under: (i) Credit Cards mean cards, which allow a customer to make payments on credit. Supplementary credit cards shall be considered part of the principal borrower for the purposes of these regulations. Corporate Cards will not fall under this category and shall be regulated by Prudential Regulations for Corporate / Commercial Banking or Prudential Regulations for SMEs Financing as the case may be. The regulations for credit cards shall also be applicable on charge cards, debit cards, stored value cards and BTF (Balance Transfer Facility). (ii) Auto Loans mean the loans to purchase the vehicle for personal use. (iii) Housing Finance means loan provided to individuals for the purchase of residential house / apartment / land. The loans availed for the purpose of making improvements in house / apartment / land shall also fall under this category. (iv) Personal Loans mean the loans to individuals for the payment of goods, services and expenses and include Running Finance / Revolving Credit to individuals. 4. DFI means Development Financial Institution and includes the Pakistan Industrial Credit and Investment Corporation (PICIC), the Saudi Pak Industrial and Agricultural Investment Company Limited, the Pak Kuwait Investment Company Limited, the Pak Libya Holding Company Limited, the Pak Oman Investment Company (Pvt.) Limited and any other financial institution notified under Section 3-A of the Banking Companies Ordinance, 1962. 5. Documents include vouchers, cheques, bills, pay-orders, promissory notes, securities for leases / advances and claims by or against the bank / DFI or other papers supporting entries in the books of a bank / DFI.

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6. Equity of the Bank / DFI means Tier-I Capital or Core Capital and includes paid-up capital, general reserves, balance in share premium account, reserve for issue of bonus shares and retained earnings / accumulated losses as disclosed in latest annual audited financial statements. In case of branches of foreign banks operating in Pakistan, equity will mean capital maintained, free of losses and provisions, under Section 13 of the Banking Companies Ordinance, 1962. 7. Financial Institutions mean banks, Development Financial Institutions (DFIs) and Non-Banking Finance Companies (NBFCs). 8. Government Securities shall include such types of Pak. Rupee obligations of the Federal Government or a Provincial Government or of a Corporation wholly owned or controlled, directly or indirectly, by the Federal Government or a Provincial Government and guaranteed by the Federal Government as the Federal Government may, by notification in the Official Gazette, declare, to the extent determined from time to time, to be Government Securities. 9. Liquid Assets are the assets which are readily convertible into cash without recourse to a court of law and mean encashment / realizable value of government securities, bank deposits, certificates of deposit, shares of listed companies which are actively traded on the stock exchange, NIT Units, certificates of mutual funds, Certificates of Investment (COIs) issued by DFIs / NBFCs rated at least A by a credit rating agency on the approved panel of State Bank of Pakistan, listed TFCs rated at least A by a credit rating agency on the approved panel of State Bank of Pakistan and certificates of asset management companies for which there is a book maker quoting daily offer and bid rates and there is active secondary market trading. These assets with appropriate margins should be in possession of the banks / DFIs with perfected lien. Guarantees issued by domestic banks / DFIs when received as collateral by banks / DFIs will be treated at par with liquid assets whereas, for guarantees issued by foreign banks, the issuing banks rating, assigned either by Standard & Poors, Moodys or Fitch-Ibca, should be A and above\ or equivalent. 10. NBFC means Non-Banking Finance Company and includes a Modaraba, Leasing Company, Housing Finance Company, Investment Bank, Discount House, Asset Management Company and a Venture Capital Company.

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11. Secured means exposure backed by tangible security with appropriate margins (in cases where margin has been prescribed by State Bank of Pakistan, appropriate margin shall at least be equal to the prescribed margin). Exposure without any tangible security is
defined as clean.

12. Tangible Security means liquid assets (as defined in these Prudential Regulations), mortgage of land and building, hypothecation or charge on vehicle, but does not include hypothecation of household goods, etc.

PART B
MINIMUM REQUIREMENTS FOR CONSUMER FINANCING Apart from the specific regulations given under each mode of financing separately, general requirements laid down here should also be followed by the banks / DFIs while undertaking consumer financing. It may be noted that these are the minimum requirements and should not in any way be construed to restrict the role of the management of the banks / DFIs to further strengthen the risk management processes through establishing comprehensive credit risk management systems appropriate to their type, scope, sophistication and scale of operations. The Board of Directors of the banks / DFIs are required to establish policies, procedures and practices to define risks, stipulate responsibilities, specify security requirements, design internal controls and then ensure strict compliance with them.

PRE-OPERATIONS Before embarking upon or undertaking consumer financing, the banks / DFIs shall implement / follow the guidelines given below. The banks / DFIs already involved in the consumer financing will ensure compliance with these guidelines within six months of the date of issuance of Prudential Regulations for Consumer Financing. 1. Banks / DFIs shall establish separate Risk Management capacity for the purpose of consumer financing, which will be suitably staffed by personnel having sufficient expertise and experience in the field of consumer finance / business.

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2. The banks / DFIs shall prepare comprehensive consumer credit policy duly approved by their Board of Directors (in case of foreign banks, by Country Head and Executive / Management Committee), which shall interalia cover loan administration, including documentation, disbursement and appropriate monitoring mechanism. The policy shall explicitly specify the functions, responsibilities and various staff positions powers / authority relating to approval / sanction of consumer financing facility. 3. For every type of consumer finance activity, the bank / DFI shall develop a specific program. The program shall include the objective / quantitative parameters for the eligibility of the borrower and determining the maximum permissible limit per borrower. 4. Banks / DFIs shall put in place an efficient computer based MIS for the purpose of consumer finance, which should be able to effectively cater to the needs of consumer financing portfolio and should be flexible enough to generate necessary information reports used by the management for effective monitoring of the banks / DFIs exposure in the area. The MIS is expected to generate the following periodical reports: i. Delinquency reports (for 30, 60, 90, 180 & 360 days and above) on monthly basis. ii Reports interrelating delinquencies with various types of customers or various attributes of the customers to enable the management to take important policy decisions and make appropriate modifications in the lending program. iii Quarterly product wise profit and loss account duly adjusted with the provisions on account of classified accounts. These profit and loss statements should be placed before the Board of Directors in the immediate next Board Meeting. The branches of foreign banks in order to comply with this condition shall place the reports before a committee comprising of CEO / Country Manager, CFO and Head of Consumer Business. 5. The banks / DFIs shall develop comprehensive recovery procedures for the delinquent consumer loans. The recovery procedures may vary from product to product. However, distinct and objective triggers should be prescribed for taking pre-planned enforcement / recovery measures. 6. The banks / DFIs desirous of undertaking consumer finance will become a member of at least one Consumer Credit Information Bureau. Moreover, the banks / DFIs may share information / data among themselves or subscribe to other databases as they deem fit and appropriate.

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7. The financial institutions starting consumer financing are encouraged to impart sufficient training on an ongoing basis to their staff to raise their capability regarding various aspects of consumer finance. 8. The banks / DFIs shall prepare standardized set of borrowing and recourse documents (duly cleared by their legal counsels) for each type of consumer\financing. OPERATIONS: 1. Consumer financing, like other credit facilities, must be subject to the banks / DFIs risk management process setup for this particular business. The process may include, identifying source of repayment and assessing customers ability to repay, his / her past dealings with the bank / DFI, the net worth and information obtained from a Consumer Credit Information Bureau. 2. At the time of granting facility under various modes of consumer financing, banks / DFIs shall obtain a written declaration from the borrower divulging details of various facilities already obtained from other financial institutions. The banks / DFIs should carefully study the details given in the statement and allow fresh finance / limit only after ensuring that the total exposure in relation to the repayment capacity of the customer does not exceed the reasonable limits as laid down in the approved policies of the banks / DFIs. The declaration will also help banks / DFIs to avoid exposure against a person having multiple facilities from different financial institutions on the strength of an individual source of repayment. 3. Before allowing any facility, the banks / DFIs shall preferably obtain credit report from the Consumer Credit Information Bureau of which they are a member. The report will be given due weightage while making credit decision. 4. Internal audit and control function of the bank / DFI, apart from other things, should be designed and strengthened so that it can efficiently undertake an objective review of the consumer finance portfolio from time to time to assess various risks and possible weaknesses. The internal audit should also assess the adequacy of the internal controls and ensure that the required policies and standards are developed and practiced. Internal audit should also comment on the steps taken by the management to rectify the weaknesses pointed out by them in their previous reports for reducing the level of risk.

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5. The banks / DFIs shall ensure that their accounting and computer systems are well equipped to avoid charging of mark-up on mark-up. For this purpose, it should be ensured that the mark-up charged on the outstanding amount is kept separate from the principal. 6. The banks / DFIs shall ensure that any repayment made by the borrower is accounted for before applying mark-up on the outstanding amount. DISCLOSURE / ETHICS The banks / DFIs must clearly disclose, all the important terms, conditions, fees, charges and penalties, which interalia include Annualized Percentage Rate, prepayment penalties and the conditions under which they apply. For ease of reference and guidance of their customers, banks / DFIs are encouraged to publish brochures regarding frequently asked questions. For the purposes of this regulation, Annualized Percentage Rate means as follows: Mark-up paid for the period Outstanding Principal Amount x 360 No. of Days x 100

PART C
REGULATIONS REGULATION R-1 FACILITIES TO RELATED PERSONS The consumer finance facilities extended by banks / DFIs to their directors, major shareholders, employees and family members of these persons shall be at arms length basis and on normal terms and conditions applicable for other customers of the banks / DFIs. The banks / DFIs shall ensure that the appraisal standards are not compromised in such cases and market rates are used for these persons. The facilities extended to the employees of the banks / DFIs as a part of their compensation package under Employees Service Rules shall not fall in this category. REGULATION R-2 LIMIT ON EXPOSURE AGAINST TOTAL CONSUMER FINANCING Banks / DFIs shall ensure that the aggregate exposure under all consumer financing facilities at the end of first year and second year of the start of their consumer financing

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does not exceed 2 times and 4 times of their equity respectively. For subsequent years, following limits are placed on the total consumer financing facilities:

PERCENTAGE OF CLASSIFIED CONSUMER FINANCING TO TOTAL CONSUMER FINANCING MAXIMUM LIMIT

a) Below 3% b) Below 5% c) Below 10% d) Upto and above 10% 10 times of the equity 6 times of the equity 4 times of the equity 2 times of the equity

REGULATION R-3 TOTAL FINANCING FACILITIES TO BE COMMENSURATE WITH THE INCOME While extending financing facilities to their customers, the banks / DFIs should ensure that the total installment of the loans extended by the financial institutions is commensurate with monthly income and repayment capacity of the borrower. This measure would be in addition to banks / DFIs usual evaluations of each proposal concerning credit worthiness of the borrowers, to ensure that the banks / DFIs portfolio under consumer finance fulfills the prudential norms and instructions issued by the State Bank of Pakistan and does not impair the soundness and safety of the bank / DFI itself.

REGULATION R-4 GENERAL RESERVE AGAINST CONSUMER FINANCE The banks / DFIs shall maintain a general reserve at least equivalent to 1.5% of the consumer portfolio which is fully secured and 5% of the consumer portfolio which is unsecured, to protect them from the risks associated with the economic cyclical nature of this business.

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REGULATION R-5 BAR ON TRANSFER OF FACILITIES FROM ONE CATEGORY TO ANOTHER TO AVOID CLASSIFICATION The banks / DFIs shall not transfer any loan or facility to be classified, from one category of consumer finance to another, to avoid classification. REGULATION R-6 MARGIN REQUIREMENTS Banks / DFIs are free to determine the margin requirements on consumer facilities provided by them to their clients taking into account the risk profile of the borrower(s) in order to secure their interests. However, this relaxation shall not apply in case of items, import of which are banned by the Government. Banks / DFIs will continue to observe margin restrictions on shares / TFCs as per existing instructions under Prudential Regulations for Corporate / Commercial Banking (R-6). Further, the restrictions prescribed under paragraph 1.A of Regulation R-6 of the Prudential Regulations for Corporate / Commercial Banking will also be applicable in case of Consumer Financing. State Bank of Pakistan shall continue to exercise its powers for fixation / reinstatement of margin requirements on financing facilities being provided by banks/DFIs for various purposes, as and when required.

REGULATIONS FOR CREDIT CARDS REGULATION O-1 The banks / DFIs should take reasonable steps to satisfy themselves that cardholders have received the cards, whether personally or by mail. The banks / DFIs should advise the card holders of the need to take reasonable steps to keep the card safe and the PIN secret so that frauds are avoided. REGULATION O-2 Banks / DFIs shall provide to the credit card holders, the statement of account at monthly intervals, unless there has been no transaction or no outstanding balance on the account since last statement.

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REGULATION O-3 Banks / DFIs shall be liable for all transactions not authorized by the credit card holders after they have been properly served with a notice that the card has been lost / stolen. However, the banks / DFIs liability shall be limited to those amounts wrongly charged to the credit card holders account. In order to mitigate the risks in this respect, the banks / DFIs are encouraged to take insurance cover against wrongly charged amounts, frauds, etc. REGULATION O-4 In case the cardholders make partial payment, the banks / DFIs should take into account the partial payment before charging service fee / mark-up amount on the outstanding / billed amount so that the possibility of charging excess amount ofmark-up could be avoided.

REGULATION O-5 Due date for payment must be specifically mentioned on the accounts statement. If fine / penalty is agreed to be charged in case the payment is not made by the due date, it should be clearly mentioned in the agreement.

REGULATION R-7 MAXIMUM CARD LIMIT Maximum unsecured limit under credit card to a borrower (supplementary cards shall be considered part of the principal borrower) shall not exceed Rs 500,000/. The banks / DFIs may allow financing under the credit card scheme in excess of the limit of Rs 500,000/(up to Rs 2 million), provided the excess amount is secured appropriately. All credit card limits in excess of Rs 2 million should be secured against liquid assets. For Charge Cards, pre-set spending limits generated by the standardized systems, as is the global practice, shall be allowed.

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REGULATION R-8 CLASSIFICATION AND PROVISIONING Table 7.1 The credit card advances shall be classified and provided for in the following
manner:

1.Classification 1. Loss

2. Department Where Markup/interest or principal is over due (past due) by 180 days from the due date.

3.Tretment of Income Unrealized Markup/Interest to be put in suspense and not to be credited to income account except when realized in cash

4.Provision to be made. Provision of 100% of the principal amount less the amount of liquid securities with the Bank/DFI.

*This specific provision will be in addition to general reserve maintained under Regulation R.4

It is clarified that the lenders are allowed to follow more conservative policies. Further, provisioning may be created and maintained by the bank / DFI on a portfolio basis provided that the provision maintained by the bank / DFI shall not be less than the level required under this Regulation. REGULATIONS FOR AUTO LOANS REGULATION R-9 The vehicles to be utilized for commercial purposes shall not be covered under the Prudential Regulations for Consumer Financing. Any such financing shall ensure compliance with Prudential Regulations for Corporate / Commercial Banking or Prudential Regulations for SMEs Financing. These regulations shall only apply for financing vehicles for personal use including light commercial vehicles also used for personal purposes.

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REGULATION R-10 The maximum tenure of the auto loan finance shall not exceed seven years. REGULATION R-11 While allowing auto loans, the banks / DFIs shall ensure that the minimum down payment does not fall below 10% of the value of vehicle. REGULATION R-12 In addition to any other security arrangement on the discretion of the banks / DFIs, the vehicles financed by the banks / DFIs shall be properly secured by way of hypothecation. Payments against the sale orders issued by the manufacturers are allowed till the time of delivery of the vehicle subject to the condition that payment will directly be made to the manufacturer / authorized dealer by the bank / DFI and upon delivery, the vehicle will immediately be hypothecated to the bank / DFI. REGULATION R-13 The tenure of the banks / DFIs shall ensure that the vehicle remains properly insured at all times during the loan. REGULATION O-6 The clause of repossession in case of default should be clearly stated in the loan agreement mentioning specific default period after which the repossession can be initiated. The repossession expenses charged to the borrower shall not be more than actual incurred by the bank / DFI. However, the maximum amount of repossession charges shall be listed in the schedule of charges provided to customers. The banks / DFIs shall develop an appropriate procedure for repossession of the vehicles and shall ensure that the procedure is strictly in accordance with law. REGULATION O-7 A detailed repayment schedule should be provided to the borrower at the outset. Where alterations become imminent because of late payments or prepayments and the installment amount or period changes significantly, the revised schedule should be provided to the borrower at the earliest convenience of the bank / DFI but not later than 15 days of the change. Further, even in case of insignificant changes, upon the request of the customer, the bank / DFI shall provide him revised repayment schedule free of cost.

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REGULATION O-8 The banks / DFIs desirous of financing the purchase of used cars shall prepare uniform guidelines for determining the value of the used vehicles. However, in no case the bank / DFI shall finance the cars older than five years. REGULATION O-9 The banks / DFIs should ensure that a good number of authorized auto dealers are placed at their panel to eliminate the chances of collusion or other unethical practices. REGULATION R-14 Table 7.2 The auto loans shall be classified and provided for in the following manner:
1.Classification 1. Substandard. 2. Department Where Markup/interest or principal is over due (past due) by 90 days from the due date. 3.Tretment of Income Unrealized Markup/Interest to be put in suspense and not to be credited to income account except when realized in cash 2. Doubtful Where Markup/interest or principal is over due by 180 days from the due date. 3. Loss Where Markup/interest or principal is over due by one year or more days from the due date.
* These specific provisions will be in addition to general reserve maintained under Regulation R.4

4.Provision to be made. No provision is required.

As above

Provision of 50% of the principal amount less the amount of liquid securities with the Bank/DFI.

As above

Provision of 100% of the principal amount less the amount of liquid securities with the Bank/DFI.

REGULATIONS FOR HOUSING FINANCE REGULATION R-15 The maximum per party limit in respect of housing finance by the banks / DFIs will be Rs 10 million. REGULATION R-16 The housing finance facility shall be provided at a maximum debt-equity ratio of 85:15.

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REGULATION R-17 Banks / DFIs shall ensure that at no time their total exposure under house financing exceeds 10% of their net advances.

REGULATION R-18 Banks / DFIs are free to extend mortgage loans for housing, for a period not exceeding twenty years. Banks / DFIs should be mindful of adequate asset liability matching.

REGULATION R-19 The house financed by the bank / DFI shall be mortgaged in banks / DFIs favour by way of equitable or registered mortgage.

REGULATION R-20 Banks / DFIs shall either engage professional expertise or arrange sufficient training for their concerned officials to evaluate the property, assess the genuineness and integrity of the title documents, etc. REGULATION R-21 The banks / DFIs management should put in place a mechanism to monitor conditions in the real estate market (or other product market) at least on quarterly basis to ensure that its policies are aligned to current market conditions.

REGULATION R-22 Banks / DFIs are encouraged to develop floating rate products for extending housing finance, thereby managing interest rate risk to avoid its adverse effects. Banks / DFIs are also encouraged to develop in-house system to stress test their housing portfolio against adverse movements in interest rates as also maturity mismatches.

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REGULATION R-23
The mortgage loans shall be classified and provided for in the following manner: 1.Classification 1.OAEM (other Assets specially mentioned 2. Department Where Markup/interest or principal is over due (past due) by 90 days from the due date. 3.Tretment of Income Unrealized Markup/Interest to be put in suspense and not to be credited to income account except when realized in cash 2. Substandard Where Markup/interest or principal is over due by 180 days from the due date. As above Provision of 20% of the difference resulting from outstanding balance principal less the amount of liquid securities and forced sale value of mortgage property as valued by valuers on the Panel of PBA. 3. Doubtful Where Markup/interest or principal is over due by one year or more days from the due date. As above Provision of 50% of the difference resulting from outstanding balance principal less the amount of liquid securities and forced sale value of mortgage property as valued by valuers on the Panel of PBA. 4.Loss. Where Markup/interest or principal is over due by two year or more from the due date As above Provision of 100% of the difference resulting from outstanding balance principal less the amount of liquid securities and forced sale value of mortgage property as valued by valuers on the Panel of PBA. * These specific provisions will be in addition to general reserve maintained under Regulation R.4 4.Provision to be made. No provision is required.

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REGULATIONS FOR PERSONAL LOANS INCLUDING LOANS FOR THE PURCHASE OF CONSUMER DURABLES REGULATION R-24 The clean limit per person for personal loans will be Rs 500,000/-. However, the banks / DFIs may lend higher amounts provided the loan is secured appropriately. But, in no case, the loan amount will be allowed to exceed Rs 1,000,000/-. The loan secured against liquid securities shall, however, be exempt from this limit. The loans against the securities issued by Central Directorate of National Saving (CDNS) shall be subject to such limits as are prescribed by CDNS / Federal Government / State Bank of Pakistan from time to time. REGULATION R-25 In cases, where the loan has been extended to purchase some durable goods / items, the same will be hypothecated with the bank / DFI besides other securities, which the bank / DFI may require on its own.

REGULATION R-26 The maximum tenure of the loan shall not exceed 5 years.

REGULATION R-27 In case of Running Finance / Revolving Finance, it shall be ensured that at least 15% of the maximum utilization of the loan during the year is cleaned up by the borrower for a minimum period of one week. In case the clean up is not made by the borrower, the loan will be appropriately classified. However, banks / DFIs who require their customers to repay a minimum amount each month, will be considered compliant with this regulation subject to the condition that the aggregate cumulative monthly installments exceed the 15% clean up requirement and accordingly the loans where the specified minimum repayments are being made by the borrowers regularly, will not require classification under this regulation.

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REGULATION R-28 The personal loans shall be classified and provided for in the following manner:
These specific provisions will be in addition to general reserve maintained under Regulation R.47.5

1.Classification 1. Substandard

2. Department Where Markup/interest or principal is over due by 180 days from the due date.

3.Tretment of Income As above

4.Provision to be made. No provision is required.

2. Doubtful

Where Markup/interest or principal is over due by 180 days or more from the due date.

As above

Provision of 50% of the principal less the amount of liquid securities with the Bank.

4.Loss.

Where Markup/interest or principal is over due by one year or more from the due date

As above

Provision of 100% of the principal less the amount of liquid securities with the Bank/DFI.

7.6 Conclusion: Pakistan s banking sector experienced significant changes during the last few years moving from nationalized commercial banks to private banks. Given that the banking sector is the most important channel of resource allocation and mobilization in an emerging economy like Pakistan, a bank failure or banking sector collapse may have devastating effects on the economy. Therefore it is important for supervisors to take necessary steps to provide a safe banking sector and ensure its stability. Besides some organizational changes in the SBP itself which makes the supervision and monitoring

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more effective, it also issued some guidelines for corporate governance of banks in Pakistan. These guidelines, in general, are drawn from the recommendations made by the international agencies but modified according to domestic economic environment and rules and regulations. In the banking sector new reforms program should aim at a positive about the dire need to launch of Internet Banking and for this purpose add new acts and evolve new regulations to seriously implement electronic banking. It is imperative to have greater co-ordination between the GOP, SBP and PTCL to make things happen and above all the innovative attitude of the GOP, to rewrite banking policies, develop new regulatory system, to prevent financial mis-hops which may occur due to electronic banking system in future.

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CHAPTER 8 Summary and Conclusions

8.1 Introduction Despite the rigorous reforms of the financial sector during the 1990s, there was a dearth of financial services offered by the financial institutions in the country. Banks and the non-bank financial institutions were largely involved only in the provision of traditional services like deposit mobilization and credit extension mainly for working capital or project financing needs of industry. Services like personal financing, credit cards or ATM facility were negligible and there was no concept of online banking, phone banking or even housing finance by the banks. The situation, however, started turning around in the 2000s when significant progress was made in improving the health and soundness of the financial sector. The privatization of public sector financial institutions, relaxation in the licensing and regulatory environment for micro and rural credit institutions, mandatory requirements for banks to get themselves evaluated by credit rating agencies, measures to improve corporate governance, removal of restrictions on consumer financing by nationalized banks, incentives to provide mortgage finance, improvement in the legal framework for defaulted loans recovery, changes in the prudential regulations enabling banks to expand their scope of lending and customer network, reduction in the corporate tax rates on banks, mandating the banks to join ATM networks and the initiation of the development of Real Time Gross Settlement (RTGS) system all helped in bringing about a sea change in the financial services offered by various financial institutions. Significant progress was made during 2001 and 2002 in terms of expansion of microfinance activities, emergence of new financial products and services, automation of retail banking transactions, modernization of payment system and Islamization of financial services. Financial services commitments under General Agreement on Trade and Services (GATS) under WTO have also impacted the financial sector in recent past. Financial services landscape of future will also be influenced by GATS. Given the fact that our formal financial institutions were unable to cater to the credit needs of micro and small enterprises, the role of Microfinance Institutions (MFIs) could

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hardly be over emphasized in overall development of our economy. These institutions are more important in our country, where around 70 percent of population is still living in the rural areas and the agriculture sector constitutes approximately 25 percent of GDP. Moreover, considerable rise in poverty incidence during 1990s also called for a greater role of these institutions. The establishment of Pakistan Poverty Alleviation Fund (PPAF) in 1999 as an autonomous private company is one of the significant developments in microfinance sector. The fund operates with a promise to alleviate poverty, improve access of communities to financial services and enhance investments in infrastructure projects. With these clear commitments, the PPAF aims at the strengthening of microfinance sector through: (1) providing a reliable source of funds to well functioning NGOs; (2) creating public awareness, particularly on the issues related to the outreach of financial services to the poor and its links to the poverty alleviation; (3) encouraging innovative products and improving the quality of existing services offered to MF sector; and (4) acting as bridge between the government and the NGOs. Moreover, the fund may ultimately act as a regulator of MFIs in the Pakistan. The privatization of public sector enterprises (PSEs) has been a recurrent theme on the international development agenda since the early 1980s. Assistance for this purpose from international aid agencies has been cautious, placing priority first on supporting stabilization programs and improving existing operational efficiencies. Assistance has also taken the form of technical and financial support for institutional strengthening, enhancing autonomy, and price reforms. Although international aid has been successful in promoting economic and social development that would not have been supported by commercial funding, international aid agencies and governments have been unable to keep pace with funding requirements and technology advances. Supply constraints have been in evidence, particularly in non-urban areas, and technical innovation and economic growth have been curtailed. These situations contrast with the evidence from reformminded economies where more conducive operating environments exist, and privatization reforms have led to higher national levels of investment, higher economic growth, increased outputs, and improved availability and quality of goods and services. Economic benefits of privatization are now widely acceptable. It not only works better and yields quick rewards, but also it brings efficiency, higher out put increasing profitability and

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developing competitive industry, which serve consumer well. The recent past has seen fundamental changes in the governments role in economy. With the defeat of socialism and the worldwide onslaught of privatization a new scenario is emerging. There have been two tides of privatization in Pakistan. The first tide is from 1992 to 1994 and the second tide from July 2001 to October 15, 2002. In the first period assets worth Rs.120 billion were divested and in the second period assets worth Rs.65 billion were divested. The consultants engaged by Asian Development Bank have conducted a thorough study of the first period. It is a detailed report but the following table sums up their findings with respect to the overall assessment of the privatization process.

Better Same Worse PMEs * 9 13 16 Misc. 3 10 1 Ghee Mills 2 12 5 Rice Mills 2 6 Banks 2 2 Total 18 37 28 Percentage 22 44 34 Source: Impact and Analysis of Privatization in Pakistan: ADB Report October 1998. * Public Manufacturing Enterprises.

Total 38 14 19 8 4 83 100%

The above table clearly indicates that only 22% of the privatized units were performing well than in the pre-privatization period, 44% approximately the same and about the third i.e 34% worse than before. It is quite clear that the compelling reason for privatization that of improving the efficiency of the units, was only attained by about 1/5 of the units, whereas the rest were working with the same efficiency or worse than before. No wonder in the article* quoted above the authors had reached the conclusion that, in Pakistan there is nothing hardly good or bad about public sector or even the private sector for that matter. On the whole, operational efficiency deteriorated after privatization. So for privatization of banks is concerned the author his reported the improvement in the efficiency of both banks. Of the three privatized banks MCB is reported to be running better. Same is the case of ABL.

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Bank privatizations are among the biggest challenges facing many governments around the world. The reluctance of states to remove themselves from the banking and credit systems is well documented, and the overall impact of state ownership on banking has been disastrous in almost every country where government ownership of banks has been pervasive. However, if the objective of a country is to establish a more efficient and market-oriented economy, reducing the influence of the state on credit allocation decisions is critically important. Broadly speaking, reforms in the financial sector are aimed at making Pakistani banks conform to the international prudential standards and also making the financial system more competitive. The competition will improve efficiency and efficiency will give birth to new products and services. Privatization policy needs to be pursued with the main objective of improving efficiency in the economy. The study of the efficiency of the financial system and particular banks has gained a lot of popularity in recent times for several reasons. The efficiency of banks is directly linked to the productivity of economy. Banking system assets constitutes substantial proportion of total output. Banks provide liquidity, payments and safekeeping for depositors and channel these funds into investment and working capital requirements. A basic benefit of enhanced efficiency is reduction in spreads between lending and deposit rates. This is likely to stimulate both greater loan demands for industrial investment (and thus contribute to higher economic growth) and greater mobilization of savings through the banking system. Banks in most developing countries operates with relatively wide spreads. Although government policies and regulations are considered a major causes of such wide spreads, studies on banking efficiency has pointed at operating efficiencies as one other possible source that needs to be investigated. Wide spreads affect intermediation and distort prices thus impairing the role of financial system in contributing to rapid economic growth. (Fields, Murphy, and Tirtiroglu 1993). The solvency of banks and the strength and soundness of the banking system is germane to the performance of the entire economy. Without a sound and efficiently functioning banking system, the economy cannot function. Solvency of the banks as an enterprise extends beyond solvency consideration for all most all enterprises. When banks fail, the whole of a nations payments system is thrown into jeopardy. Therefore, banking

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supervisors place a lot of emphasis on banks operating efficiency. Today the banks are the most important financial institutions, which play a vital role through out the worlds economic system. Developed banking system is indispensable for development of trade and commerce. Banking sector in Pakistan has very short history. Prior to pre-partition entire banking sector was dominated by Hindus, which created the great financial vacuum after shifting of their business to India. The private banking sector in Pakistan is not new experiment. There were some private banks in Pakistan before and after the partition of subcontinent. Habib Bank Ltd., which was functioning in Bombay, shifted to Pakistan in the year 1947 and extended its net working through out the country with its head office at Karachi. The Australasia Bank Ltd. has already been in operation in Pakistan since 1942. The first two banks, which were established in private sector, were the Muslim commercial bank ltd. founded by Mr. Adamjee and the bank of Bahawalpur in the year 1948. In the year 1949 National bank of Pakistan came into operation to act as a semi government treasury in the country. In the year of 1959, the Saigal group of companies established United Bank ltd. According to the policy of the then government (Peoples Party Government claiming social democrats) all the banks were nationalized through an act called the Bank (nationalization) Act 1974. Nationalization policy adversely affected the progress of different areas of the banking system, which exposed to government; influences were misused in the domestic as well as the overseas operations. This resulted the great setback to the prevailing economic system. (Banking and Trade Management by Syed Agha Husain, 1978)

8.2 Banks Privatized So For Realizing the fact, the first two banks, which were immediately dis-invested and handed over to private sector, were Muslim Commercial Bank and Allied bank of Pakistan Ltd. MCB has acquired by private investor and Allied bank was taken over by management group of the workers employed in the bank. The new set up proved its worth, through high quality of service in the market. So for 6 banks have been privatized while shares of

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National Banks of Pakistan have been floated through an initial public offering. Details of privatized banks are as under: Muslim Commercial Bank Ltd. Fully divested and now owned and controlled by a domestic private group. Allied Bank of Pakistan Ltd. 51 % shares sold to the Allied Management Group (AMG) representing employees of the ABL. Banker Equity Ltd. 51 percent shares were sold to a domestic private consortium but eventually the entity was forced into liquidation. An unsuccessful privatization episode. Bank Al-Falah Ltd. Fully divested, controlled and owned by a foreign group. United Bank Ltd. 51 percent shares sold and management transferred to a group of private investor and expatriate Pakistani. National Bank of Pakistan 23.2 percent shares divested through stock exchange.

8.3 Achievements of the Study The principal objective of this study, therefore, is to provide answers to some of the issues investigating the efficiency of commercial banks operating in Pakistan. The study is divided into six parts. In the first part of the study we have utilized the different financial tools to judge the efficiency of the banks after privatization. Moreover, the study has attempted to provide empirical evidence on the efficiency of similar banks in Pakistan. The main criteria for judging performance of the financial system are: Allocative efficiency. Which depends on the systems ability to arrange financing that is mutually beneficial to potential supplier and user of capital. Operational efficiency. reliability of the system. Dynamic efficiency. Which depends on the innovativeness of the system and on the resulting benefits to the system users. Which depends on the cost-effectiveness and

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In part-1 of the study researcher has examined various areas of efficiency using theoretical model TARCSIMEL, most of them are showing improvement. The main problem of Pakistani banking sector was failure of governance due to government and political influence and non-performing loans. The study shows that both problems were controlled through State Bank prudential rules. Profitability and liquidity of the two banks selected as case study also improved. Because of competition new products are invented but the spread rate is still high and need decrease to attract borrowers to stimulate economic activities. Researcher has also carried comparative study using ratio analysis technique for looking at the financial performance of the two banks and its comparison with similar bank working in public sector (recently privatized). The ratio analysis of three banks clearly shows that performance of MCB (privatized bank) is better then performance of UBL (public sector bank). The performance of ABL is lower in rank from UBL not because of privatization but because of management problems and method of privatization of the bank. On the basis of ratio analysis results and the list of new products and services it is conclude that privatization improve efficiency. In section two the study has examined the impact of privatization of banks on economy. Commercial banks and financial institutions have historically played an important role in economic growth. The financial sector in Pakistan needs to establish itself as an engine of growth. Economic growth and development of a country depends on the health of its financial sector. Financial sector includes banking sector. Banking sector provides a very vital input viz., finance to the economy. It also performs the function of mobilization of savings its role become important for capital formation, which in turn influences the countrys growth and development. In this study researcher have developed two hypotheses, "Better the banking system the greater will be the economic Growth. and "Worse the banking system the lesser will be the economic growth. Researcher has used simple statistics calculating correlation among the sub hypotheses i.e. deposits, investment, GNP and lending etc. It is found

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there is significant correlation among the sub hypotheses that proves that banks play important role in economic growth. The section three of the study also surveyed the employment impact of privatization of banks in Pakistan. Researcher has used the secondary data collected from various annual reports of the two banks and State bank of Pakistan. It is found that there has no labor shading in the two privatized banks. The number of employees in MCB is showing slight decrease of 2.25% of total employees. This may be because of retirement etc. so far ABL is concerned the exact data about employees for post privatization period is not available but numbers of branches are increased and it is hoped that there will no negative impact on numbers of employees. Operating cost per employee is showing increase in both banks, it indicates the sharp increase in wage rates in banking sector. It has also observed that the cause of higher operating cost is that numbers of employees reduced are field force while the upper management is still more then requirement and getting huge amount of benefits. Researcher also observed that the maximum employees took gold handshake are readjusted in the new private banks. In 1990 the total number of banks in Pakistan was 24 where 7 banks were state owned and 17 were foreign banks, while in 2004 the total numbers of the banks in Pakistan is 40, that include 4 state owned banks, 20 domestic private banks and 13 foreign banks and 3 specialized banks. The average employees before privatization in the state owned banks were 8529 while there was no private bank The net increase in numbers of banks are 16 and using mean as new employment in the sector the banking sector can adjust more then one lack. But total decrease in state owned banks are approx. 12000 after or during preparation for privatization. So it can be concluded that privatization of bank has no negative impact on employees but it will create new jobs. In part four of the study researcher has also studied the impact of privatization of banks on customers. It is found that two many new products and services especially about consumer financing are introduced by both banks after privatization. These new products and services have positive impact on customers services. With a phenomenal growth of electronic transactions internationally, it was crucial for Pakistan to develop its ecommerce infrastructure to be the part of global economy. But due to the capitalintensive nature of such operations, Pakistani banks have been lagging behind in offering

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e-commerce services in the past. It is only during last couple of years, when the ebanking witnessed some growth in the country. Banks are now investing heavily to bring their operations on modern technological grounds. To facilitate their customers, each bank is now maintaining its website to provide a comprehensive information regarding the services that they offer. Wide-ranging services like Automated Teller Machines, credit cards, debit cards and phone banking are now common among most of the banks. In part five of the study is based on legal environment in the country after privatization of banks. The basic objective of the law is to protect the rights of the peoples. It is found that with change in working environment of the banks the legal environment is changed. A new consumer financing products and services required new rules and regulation for proper monitoring and management State Bank of Pakistan as a prudential authority and Government of Pakistan has changed the regulatory environment as required.

8.4 Conclusion

This study reveals the following among other important conclusions: (a) The bank deposits have increased from Rs.354.6 billions in 1990 to Rs. 1885.6 billions in 2004. This means an average increase of about 37%. That is the reason why the banks have started having a commanding position over the nation's economy in general and financial resources in particular. (b) In 1990, there were 24 banks (both domestic public banks and foreign banks and there was no single private bank in Pakistan). In 2004 there are 40 banks including 20 banks in private sector. In 1990 there were 7 banks in public sector while in 2004 there are just four banks in public sector but all are in pipe for privatization. (c) The total asset of banking sector in Pakistan including foreign banks were Rs. 425.6 billions and 92.2% of the total share was under government control and 7.8% share was under control of foreign banks. After privatization total assets of banking sector are Rs. 2787.2 billion while government has only Rs. 518.8 billion share in total but private banks have Rs.1840.3 billion.

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(d) The total equity of all the Pakistani banks including foreign banks before privatization (numbering24) was Rs. 17.4 billion but total equity of banking sector in Pakistan after privatization is Rs. 130.9 billion. (e) Before Privatization the banking sector was providing routine customer services using old tools and techniques. There was no single bank providing ATM, Credit Card and on line facilities, While after privatization most of banks are providing ATM, credit cards and on line facility to customers. Too many new products are introduced by banking sector including public and private banks. (f) The Non-performing loan of nationalized commercial banks in Pakistan Rs. 82063 millions which is 1341 of net advances, while in privatized banks the ratio is 9.83 and in the ratio of private bank is 4.05 of net advances. The data clearly shows that privatized and private banks ratios of NPL are less as compared to nationalized banks in Pakistan after privatization. (g) The numbers of employees are decreased after privatization. Employees are properly paid in shape of gold handshake program. The maximum of employees were laid off before privatization during preparation process. The results of the study and studying privatization literature lead me to conclude that The first lesson of the past two decades of privatization is that privatization can work. Privatization has had, for the most part, a positive impact on the countries that have implemented it. This study shows the impact of privatization on banks performance, on economic growth, fiscal adjustment, on foreign investment (both direct and portfolio), customers welfare effect, on employment and on regulations. In a landmark study, Galal et al. (1994) found that the welfare impact of privatization in eleven out of twelve cases studied was positive, i.e., that there was a net welfare gain from privatization. The crosscountry study chose three companies in each of four countries (United Kingdom, Chile, Mexico, and Malaysia) privatized between 1982 and 1990. According to the study, the positive welfare effect of privatization resulted from productivity improvements, from optimizing investments, from efficiency pricing, and from increased flexibility in hiring. The study also shows that the key determinants of the success of privatization are competition in the marketplace into which the enterprise is being divested, effective

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regulation of non-competitive sectors, the credibility of government commitments, efficient capital markets, the relinquishing of control to the private sector, and transparency in the privatization process. A study funded by the Asian Development Bank in 1998 found that the 92 privatizations carried out between 1991 and 1997 were an overall success. The privatization programme achieved, at least partially, most of its objectives, including improving the efficiency of enterprises and the economy, improving state finances, widening and deepening capital ownership, and protecting the interests of employees. In a detailed analysis of 21 enterprises, the study concluded that there had been economic benefits in 10, poorer performance in 5, and in 6, the position was roughly neutral. Study also shows that privatization contributes to economic growth through productivity gains, efficient utilization of resources, better governance and expansion in output and employment. Profit making enterprises under the public sector may be making profits due to the unique market structure such as monopoly or other privileges or concessions conferred upon them by the government but it does so at the expense of the consumer who has to pay higher than market price for the product or the services. The example of National Bank of Pakistan and some state owned banks in other countries showing more profit as compared to private banks because of some privileges and concessions from government sides. The ordinary consumer gets a benefit only through competition among private sector firms in form of lower prices and better services as has been demonstrated in the cases of banking, telecommunications and, more recently, air travel. In a deregulated market environment, public ownership becomes a serious constraint as the rule bound procedures and the rigidity in the structure do not allow public sector companies the flexibility to respond promptly to dynamic market conditions. Furthermore, the governments role as a regulator and neutral umpire becomes questionable once it is itself a participant in the game through its own company. This stifles competition and subverts expansion and growth by the private sector companies. Privatization and its effect on employees is concerned the implications for privatization of this framework are mixed. Privatization is accepted as part of a necessary shift in public sector activity towards a more enabling, rather than direct employment creation approach (Cameron and Irfan 1992). But it is also important to recognize that the scale and breadth of

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the unemployment challenge in the 1990s is such that privatization cannot be regarded as sufficient as the core of employment policy. The markets for various types of labour in Pakistan are as imbalanced and complex as any in the world and unlikely to produce satisfactory economic or political outcomes simply through government withdrawal - notably for women. Pakistan's labour force is currently growing at more than three percent per annum, which will mean more than one and a quarter million new people wishing to be economically active each and every year in addition to those already unemployed. An annual real GNP growth rate of about eight percent on the current sectoral pattern and estimated employment elasticities would be just about sufficient to provide this quantity of new work opportunities. Employees in thousands are separated on gold hand shake programme in privatization of banking sector, but due to establishment of new private banks in the country maximum of them are accommodated. As result of the privatization of the banking sector in Pakistan, only 18.6 percent of banking sector assets now remains with the public sector. Prior to the initiation of the privatization process, public sector banks controlled more then 92 percent of banking sector assets, while the rest were in the hands of foreign banks which were playing only marginal role. At that time, there were no banks owned by the domestic private sector. Now more then 80% of banking assets, deposit and equity are with the private sector banks. The basic objective of privatization to increase competition in the banking sector has intensified so much that the average lending rates have come down from 21 percent to 5 percent with in a span of few years. The intermediation cost, inflation rate and real interest rate of have come down significantly. The two banks selected as a case study, Allied bank was not transferred to a strategic investor but instead management control was given to its employees. This approach proved even worse then the experience with public ownership. Efforts are now to underway to transfer the majority share to private sector financial institution through a competitive bidding process. In contrast MCB was sold to a group of private strategic investor who have turned around the bank and improved all indicators, including improved service to customers, technology up gradation and cost efficiency. It can be

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therefore, concluded that for privatization to bring about tangible results, it must be done the right way.

8.5 Implications of the study So for implications of privatization are concerned, no doubt, there are many pitfalls to privatization. Privatization has rarely worked out ideally because it is so intertwined with political concerns, in post-communist economies or in developing nations like Pakistan where corruption endemic. Privatization programme is very politically sensitive, raising many legitimate political debates. Setting values of the assets, privatization methods, allowing foreigners to buy privatized enterprises and other relevant matters are also under fire in Pakistan. It is also cleared to all that the start of privatization in Pakistan was to obey the order of the donors agencies similarly to other developing countries always looking for financial aid. Published financial statement is the only publicly available report on financial condition of a banks operating in Pakistan. Published data is used in research taken from annual reports of two banks and annual report of State Bank of Pakistan. So data used in research is recorded facts refers to the data drawn from the accounting records. It should be clear, therefore, that recorded facts (accounting record) does not show the financial position of the bank in terms of current economic conditions because historical costs rather than current costs are given for most of the items in the financial statements used for analysis. The certain factors that may affect the financial position of business may not be recorded in the accounting record. Therefore, there are many limitations of financial statements. First, they are essentially interim reports and cannot be final because the actual gain and loss can be determined only when it is sold or liquidated. Secondly, the financial statements show exact dollar amounts, which give an impression of finality and precision. The reader may ascribe to these amounts his own concept of value, whereas the statements may have set up on the basis of quite different value standards. Third, both the balance sheet and the income statement reflect transactions that involve dollar values of many dates. Forth, financial statements do not reflect many factors, which affect financial condition and operating results because they cannot be stated in terms of money.

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One another serious problem researcher has faced during collection of data were noncooperation of banks management and other relevant agencies. Bank is sensitive business and asking queries and questions are not replied. Access to data of banking sector is not easy in country like Pakistan.

8.6 Recommendations The studies surveyed in this thesis leaded us to conclude that there are a series of very important issues and questions that must be addressed in order for bank privatization to be successful. Some, if not most, of these issues do not come into the equation in nonfinancial privatizations. For bank privatization to be successful in any country, a set of conditions must be achieved that ensure the greatest likelihood for the establishment of a viable banking system. The researcher suggests that the following conditions represent the minimum conditions for achieving this goal. The first and the foremost strategy should be that NPA should be brought down to zero. There should be no recurrence of NPAs in future. The banks, which have reduced the NPAs, should be rewarded by State bank of Pakistan/Government of Pakistan. A bank regulatory system must be developed that is sufficiently independent from political influence. This is essential for effective bank examination, supervision and monitoring. Financial reporting systems must be developed that allow for transparency, especially with regard to asset quality and true profitability. Effective methods of dealing with bad loans prior to and/or during the privatization process are essential. This problem is especially severe in situations where uncollectable loans are outstanding to state-owned enterprises (SOEs).

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It is essential to eliminate the culture and propensity of banks to lend to these SOEs after privatization is critical, especially in economies with large remaining concentrations of SOEs, and in transition economies

There must be assurances that if the government does retain partial ownership; it acts only as a passive investor. This is essential to prevent the continuation of past credit-allocation decisions made by the government, usually on some political or central-planning basis.

Process of privatization must be transparent

8.7 Suggestions for Further Research The present day environment is so dynamic and fast changing thus making it very difficult for any modern business enterprise to operate. Because of uncertainties, threats and constraints, the banking sector in Pakistan is under great pressure and is trying to find out the ways and means for their healthy survival. Consequent upon adoption of policy of economic liberalization all over the world leading to tumbling of trade barriers, free flow of capital, globalization of markets, increased economic interdependencies and foray of transnational in every conceivable sector, business milieu in every part of the globe has, of late, become highly competitive and complex. Commercial banks need to become conscious that they are entering a challenging environment and will have to redefine their position within the financial industry. New ways and methods will have to be determined in order to successfully respond to the new challenges particularly, the growing demand from customers from high quality service. Autonomy of financial institutions, prudential regulations and vigilant supervision is more important than privatization of financial institutions. Policies will have to have some target of minimum unavoidable inflation rate. Monetary and fiscal policies should be consistent with the target prices objectives. The structure of interest rate must be left to market forces. Exchange rate should be market determined. Nominal wages rates should be linked to the average rate of inflation and productivity of labor. The regulatory framework must be tightened; increasing liberalization will require effective monitoring, supervision and regulation.

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The history of new products of Pakistan Tele Communication Limited should not be ignored. Telephones booths were installed in public places like hospitals, universities and markets to facilitate customers. Most of booths were broken and misused by the peoples. In the result this facility is withdrawn by PTCL and also faced a huge losses. Peoples can repeat the history in connection of installation of ATM and other new products of the banking sector. The government of Pakistan in this regard also requires proper planning and supervision. For Purposeful and Effective Research it is suggested that: 1. The Government of Pakistan should give first priority to regulatory framework for privatization of banks. The new products and services introduced by the banking sector after reform need proper regulations, especially consumer financing is one of the most difficult task for banking sector not only in Pakistan but also throughout the world. How to perform it properly need further research. 2. In the new millennium the banks and financial institutions will get transformed into universal banks. The traditional working capital financing is no longer the banks major lending area while the financial institutions are no longer dominated in term lending. Both of them have realized the risk of one product dominance and they need to diversify their portfolio. Universal banking aims at fulfilling all the financial needs of the customers under one roof. How Pakistani banking sector can do this need further research. 3. Finally, what role can privatization play in equipping banking and countries to meet the challenges posed by major economic forces such as globalization and the rapid growth of information based business? How can developing countries structure privatization programs to most effectively attract the foreign direct investment from multi national companies? All of these are questions, which can, and should, be answered using the tool of economic analysis.

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213

APPENDIX

214

Appendix 1.1: List of Scheduled Banks Operating in Pakistan As on 30th June 2000 As on 31st December 2002 Public sector commercial banks Public sector commercial banks 1 First Women Bank Ltd. 1 First Women Bank Ltd. 2 Habib Bank Ltd. 2 Habib Bank Ltd. 3 National Bank of Pakistan 3 National Bank of Pakistan 4 United Bank Ltd. 4 The Bank of Khyber 5 The Bank of Khyber 5 The Bank of Punjab 6 The Bank of Punjab Domestic private banks Domestic private banks 1 Muslim Commercial Bank Ltd 1 Muslim Commercial Bank Ltd 2 Allied Bank of Pakistan Ltd. 2 Allied Bank of Pakistan Ltd. 3 Askari Commercial Bank Ltd. 3 United Bank Ltd. 4 Bank Al-Falah Ltd. 4 Askari Commercial Bank Ltd. 5 Bank Al-Habib Ltd. 5 Bank Al-Falah Ltd. 6 Bolan Bank Ltd. 6 Bank Al-Habib Ltd. 7 Faysal Bank Ltd. 7 Bolan Bank Ltd. 8 Gulf Commercial Bank Ltd. 8 Faysal Bank Ltd. 9 Metropolitan Bank Ltd. 9 Metropolitan Bank Ltd. 10 Platinum Commercial Bank Ltd. 10 KASB Bank Ltd. 11 Prime Commercial Bank Ltd. 11 Prime Commercial Bank Ltd. 12 Prudential Commercial Bank Ltd. 12 Saudi Pak Commercial Bank Ltd. 13 Soneri Bank Ltd. 13 Soneri Bank Ltd. 14 Union Bank Ltd. 14 Union Bank Ltd. 15 Meezan Bank Ltd 16 PICIC Commercial Bank Ltd Foreign Banks Foreign Banks 1 ABN AMRO Bank N.V. 1 ABN AMRO Bank N.V. 2 Al- Baraka Islamic Bank B.S.C. (EC) 2 Al- Baraka Islamic Bank B.S.C. (EC) 3 American Express Bank Ltd. 3 American Express Bank Ltd. 4 Bank of Ceylon 4 Bank of Ceylon 5 Citibank N.A. 5 Citibank N.A. 6 Credit Agricole Indosuez 6 Credit Agricole Indosuez 7 Deutsche Bank AG 7 Deutsche Bank AG 8 Doha Bank 8 Doha Bank 9 Emirates Bank International PJSC 9 Habib Bank AG Zurich 10 Habib Bank AG Zurich 10 International Finance Investment and Commerce Bank Ltd. 11 International Finance Investment and Commerce 11 Mashreq Bank psc 12 Mashreq Bank psc 12 Oman International Bank S.A.O.G. 13 Oman International Bank S.A.O.G. 13 Rupali Bank Ltd. 14 Rupali Bank Ltd. 14 Standard Chartered Bank 15 Societe Generale, The French and International Bank 15 The Bank of Tokyo-Mitsubishi Ltd. 16 Standard Chartered Bank 16 The Hong Kong and Shanghai Banking Corporation Ltd. 17 Standard Chartered Grindlays Bank Ltd. 18 The Bank of Tokyo-Mitsubishi Ltd. 19 The Hong Kong and Shanghai Banking Corporation Specialized banks Specialized banks 1 Agricultural Development Bank of Pakistan 1 Zari Taraqiati Bank Ltd. (old ADBP) 2 Punjab Provincial Cooperative Bank 2 Punjab Provincial Cooperative Bank 3 Federal Bank for Cooperatives 3 Industrial Development Bank of Pakistan 4 Industrial Development Bank of Pakistan Micro Finance Banks 1 Khushhali Bank Micro Finance Banks 2 The First Micro Finance Bank Ltd

215

Appendices 1.1Continued List of NBFIs Operating in Pakistan

As on 30th June 2000 As on 31st December 2002

Development Finance Institutions

1 National Development Finance Corporation 2 Pakistan Industrial Credit & Investment Corporation Ltd. 3 Pak-Kuwait Investment Company (Pvt) Ltd. 4 Pak-Libya Holding Co. (Pvt) Ltd. 5 Bankers Equity Ltd. 6 Regional Development Finance Corporation 7 Saudi Pak Industrial & Agricultural Inv. Co. (Pvt) Ltd. 8 Small Business Finance Corporation (SBFC) 9 Investment Corporation of Pakistan

Development Finance Institutions

1 Pakistan Kuwait Investment Company (Pvt) Ltd. 2 Pak-Libya Holding Co. (Pvt) Ltd. 3 Pakistan Industrial Credit and Investment Corporation Ltd. 4 Saudi Pak Industrial & Agricultural Inv. Co. (Pvt) Ltd. 5 Pak-Oman Investment Company Limited 6 Investment Corporation of Pakistan 7 SME Bank

Investment Banks
1 Al - Meezan Investment Bank Ltd. 2 Al-Faysal Investment Bank Ltd. 3 AlTowfeek Investment Bank Ltd. 4 Asset Investment Bank Ltd. 5 Atlas Investment Bank Ltd. 6 Crescent Investment Bank Ltd. 7 Escorts Investment Bank Ltd. 8 Fidelity Investment Bank Ltd. 9 First international Investment Bank Ltd. 10 Franklin Investment Bank Ltd. 11 Islamic Investment Bank Ltd. 12 Jahangir Siddiqui Investment bank Ltd. 13 Orix Investment Bank Ltd. 14 Prudential Investment Bank Ltd. 15 Security Investment Bank Ltd. 16 Trust Investment Bank Ltd..

Investment Banks
1 Asset Investment Bank Ltd. 2 Atlas Investment Bank Ltd. 3 Crescent Investment Bank Ltd. 4 Escorts Investment Bank Ltd. 5 Fidelity Investment Bank Ltd. 6 First international Investment Bank Ltd. 7 First Standard Investment Bank Limited 8 Franklin Investment Bank Ltd. 9 Islamic Investment Bank Ltd. 10 Jahangir Siddiqui Investment bank Ltd. 11 Orix Investment Bank Ltd. 12 Prudential Investment Bank Ltd. 13 Security Investment Bank Ltd. 14 Trust Investment Bank Ltd..

Leasing Companies
1 Asian Leasing Corporation Ltd. 2 Askari Leasing Company Ltd. 3 Atlas Lease Ltd. 4 Capital Assets Leasing Corporation Ltd. 5 Crescent Leasing Company Ltd. 6 Dadabhoy Leasing Company Ltd. 7 Dawood Leasing Company Ltd. 8 English Leasing Ltd. 9 First Leasing Corporation 10 Ghandhara Leasing Company Ltd. 11 Grays Leasing Ltd. 12 Ibrahim Leasing Ltd. 13 Inter Asia Leasing Company Ltd. 14 International Multi Leasing Corporation Ltd. 15 Lease Pak Ltd. 16 Mercantile Leasing Company Ltd. 17 National Assets Leasing Corporation Ltd.

Leasing Companies
1 Askari Leasing Company Ltd. 2 Capital Assets Leasing Corporation Ltd. 3 Crescent Leasing Company Ltd. 4 Dawood Leasing Company Ltd. 5 First Leasing Corporation 6 Grays Leasing Ltd. 7 Ibrahim Leasing Ltd. 8 Inter Asia Leasing Company Ltd. 9 International Multi Leasing Corporation Ltd. 10 Lease Pak Ltd. 11 National Development Leasing Corporation Ltd. 12 Natover Lease & Refinance Ltd. 13 Network Leasing Corporation Ltd. 14 Orix Leasing Pakistan Ltd. 15 Pacific Leasing Corporation Ltd. 16 Pak-Apex Leasing Company Ltd. 17 Pak-Gulf Leasing Ltd.

216

18 National Development Leasing Corporation Ltd. Appendix 1.1 Continued.. 19 Natover Lease & Refinance Ltd. 20 Network Leasing Corporation Ltd. 21 Orix Leasing Pakistan Ltd. 22 Pacific Leasing Corporation Ltd. 23 Pak-Apex Leasing Company Ltd. 24 Pak-Gulf Leasing Ltd. 25 Pakistan Industrial & Commercial Leasing Ltd. 26 Pakistan Industrial Leasing Corporation Ltd 27 Paramount Leasing Ltd. 28 Saudi Pak Leasing Company Ltd. 29 Security Leasing Company Ltd. 30 Sigma Leasing Corporation Ltd. 31 Trust Leasing Corporation Ltd. 32 Union Leasing Ltd. 33 Universal Leasing Corporation Ltd.

18 Pakistan Industrial & Commercial Leasing Ltd.

19 Paramount Leasing Ltd. 20 Saudi Pak Leasing Company Ltd 21 Security Leasing Company Ltd. 22 Sigma Leasing Corporation Ltd. 23 Trust Leasing Corporation Ltd. 24 Union Leasing Ltd. 25 Universal Leasing Corporation Ltd.

Modarabas
1 Al-Noor Modaraba 2 Allied bank Modaraba 1st 3 Al-Zamin Modaraba 4 B.F. Modaraba 5 B.R.R. International Modaraba 6 Confidence Modaraba 1st 7 Constellation Modaraba 1st 8 Crescent Modaraba 1st 9 Custodian Modaraba 1st 10 Dadabhoy Modaraba 1st 11 Elite Capital Modaraba 1st 12 Equity Modaraba 1srt 13 Fidelity Leasing Modaraba 1st 14 Financial Link Modaraba 15 General leasing Modaraba 1st 16 Grindlays Modaraba 1st 17 Guardian Leasing Modaraba 18 Habib Bank Modaraba 1st 19 Habib Modaraba 1st 20 Hajveri Modaraba 1st 21 IBL Modaraba 1st 22 Ibrahim Modaraba 1st 23 Imrooz Modaraba 1st 24 Industrial Capital Modaraba 1st 25 Interfund Modaraba 1st 26 Islamic Modaraba 1st 27 LTV Capital Modaraba 28 Mehran Modaraba 1st 29 Modaraba Al Tijarah 30 Modaraba Al-Mali 31 National Modaraba 1st 32 Pak Modaraba 1st 33 Paramount Modaraba 1st 34 Professional Modaraba 1st 35 Providence Modaraba 1st 36 Prudential Modaraba 1st 37 Prudential Modaraba 2nd 38 Prudential Modaraba 3rd 39 Punjab Modaraba 1st 40 Schon Modaraba 41 Tri-Star Modaraba 1st 42 Tri-Star Modaraba 2nd 43 Trust Modaraba 44 UDL Modaraba 1st 45 Unicap Modaraba 46 Unity Modaraba

Modarabas
1 Al-Noor Modaraba 2 Allied bank Modaraba 1st 3 Al-Zamin Modaraba 4 B.F. Modaraba 5 B.R.R. International Modaraba 6 Constellation Modaraba 1st 7 Crescent Modaraba 1st 8 Custodian Modaraba 1st 9 Elite Capital Modaraba 1st 10 Equity Modaraba 1srt 11 Fayzan Manufacturing Modaraba 12 Fidelity Leasing Modaraba 1st 13 Financial Link Modaraba 14 General leasing Modaraba 1st 15 Grindlays Modaraba 1st 16 Guardian Leasing Modaraba 17 Habib Bank Modaraba 1st 18 Habib Modaraba 1st 19 Hajveri Modaraba 1st 20 IBL Modaraba 1st 21 Imrooz Modaraba 1st 22 Industrial Capital Modaraba 1st 23 Interfund Modaraba 1st 24 Islamic Modaraba 1st 25 LTV Capital Modaraba 26 Mehran Modaraba 1st 27 Modaraba Al Tijarah 28 Modaraba Al-Mali 29 National Modaraba 1st 30 Pak Modaraba 1st 31 Paramount Modaraba 1st 32 Professional Modaraba 1st 33 Prudential Modaraba 1st 34 Punjab Modaraba 1st 35 Tri-Star Modaraba 1st 36 Tri-Star Modaraba 2nd 37 Trust Modaraba 38 UDL Modaraba 1st 39 Unicap Modaraba 40 Unity Modaraba

Housing Finance Companies

1 Citibank Housing Finance Co. Ltd. 2 House Building Finance Corporation

Housing Finance Companies

1 Citibank Housing Finance Co. Ltd. 2 House Building Finance Corporation

217

3 International Housing Finance Ltd. 4 LTV Housing Finance Ltd.

3 International Housing Finance Ltd. 4 LTV Housing Finance Ltd.

1.1 continued Mutual Funds

1 1st ICP Mutual Fund 2 2nd ICP Mutual Fund 3 3rd ICP Mutual Fund 4 4th ICP Mutual Fund 5 5th ICP Mutual Fund 6 6th ICP Mutual Fund 7 7th ICP Mutual Fund 8 8th ICP Mutual Fund 9 9th ICP Mutual Fund 10 10th ICP Mutual Fund 11 11th ICP Mutual Fund 12 12th ICP Mutual Fund 13 13th ICP Mutual Fund 14 14th ICP Mutual Fund 15 15th ICP Mutual Fund 16 16th ICP Mutual Fund 17 17th ICP Mutual Fund 18 18th ICP Mutual Fund 19 19th ICP Mutual Fund 20 20th ICP Mutual Fund 21 21st ICP Mutual Fund 22 22nd ICP Mutual Fund 23 23rd ICP Mutual Fund 24 24th ICP Mutual Fund 25 25th ICP Mutual Fund 26 ICP SEMF 27 Investment Corporation Of Pakistan (Mutual Funds only) 28 National Investment Trust Ltd. 29 Golden Arrow Selected Stock Fund 30 Tri-Star Mutual Fund 31 Growth Mutual Fund 32 Security Stock Fund 33 Asian Stock Fund 34 Prudential Stock Fund 35 KASB Premier Fund 36 Safeway Mutual Fund 37 First Capital Mutual Fund 38 Confidence Mutual Fund 39 Dominion Stock Fund 40 Al-Meezan Mutual Fund

Mutual Funds
1 1st ICP Mutual Fund 2 2nd ICP Mutual Fund 3 3rd ICP Mutual Fund 4 4th ICP Mutual Fund 5 5th ICP Mutual Fund 6 6th ICP Mutual Fund 7 7th ICP Mutual Fund 8 8th ICP Mutual Fund 9 9th ICP Mutual Fund 10 10th ICP Mutual Fund 11 11th ICP Mutual Fund 12 12th ICP Mutual Fund 13 13th ICP Mutual Fund 14 14th ICP Mutual Fund 15 15th ICP Mutual Fund 16 16th ICP Mutual Fund 17 17th ICP Mutual Fund 18 18th ICP Mutual Fund 19 19th ICP Mutual Fund 20 20th ICP Mutual Fund 21 21st ICP Mutual Fund 22 22nd ICP Mutual Fund 23 23rd ICP Mutual Fund 24 24th ICP Mutual Fund 25 25th ICP Mutual Fund 26 ICP SEMF 27 Investment Corporation Of Pakistan (Mutual Funds Only) 28 National Investment Trust Ltd. 29 Golden Arrow Selected Stock Fund 30 Tri-Star Mutual Fund 31 Growth Mutual Fund 32 Asian Stock Fund 33 Prudential Stock Fund 34 KASB Premier Fund 35 Safeway Mutual Fund 36 First Capital Mutual Fund 37 Dominion Stock Fund 38 Al-Meezan Mutual Fund

Discount Houses
1 First Credit & Discount Corporation (Pvt) Ltd. 2 National Discounting Services Ltd. 3 Prudential Discount & Guarantee House Ltd. 4 Speedway Fondmetal (Pakistan) Limited

Discount Houses
1 First Credit & Discount Corporation (Pvt) Ltd. 2 National Discounting Services Ltd. 3 Prudential Discount & Guarantee House Ltd. 4 Speedway Fondmetal (Pakistan) Limited

Venture Capital Companies

1 Pakistan Emerging Ventures Ltd. 2 Pakistan Venture Capital Ltd. 3 TMT Venture Limited 4 TRG Pakistan Limited

Venture Capital Companies

1 Pakistan Emerging Ventures Ltd. 2 Pakistan Venture Capital Ltd.

218

Privatization Proceeds From I Transactions From 1991 to June 30, 2003 Sr. No Unit Name Banking and Finance Bank 1 2 3 4 5 6 Allied Bank Limited (51%) Muslim Commercial Bank (75%) Bankers Equity (26%) Habib Credit & Exchange (70 %) United Bank Ltd. (51%) Bank Alfalah Capital Market Transaction 7 8 9 10 11 12 13 14 15 16 17 Muslim Commercial Bank (6.8%) Muslim Commercial Bank (4.4%) NBP (37.3 million shares) Muslim Commercial Bank (CDC) Pakistan Oil Fields Limited shares (CDC) ICP Lot A ICP Lot B ICP SEMF National Bank of Pakistan 10% shares thru stock exchange Attock Refinery Limited shares (CDC) DG Khan Cement shares (CDC) Total Total Banking & Finance: Energy Sector 18 19 20 21 22 23 24 25 26 27 28 29 1.2 Continued Mari Gas (20%) Kot Addu Power Company (26%) Kot Addu Power Company (10%) Kot Addu (Escrow A/c) SSGC LPG business SNGPL LPG business Badin II (Revised) Adhi Dhurnal Ratana Badin I Turkwal Total 102.4 6,707.6 2,370.7 1,033.0 369.0 142.0 516.1 681.4 230.7 32.0 8,599.1 120.3 20,904.3 Apr-94 Jun-96 Nov-96 Apr-02 Aug-00 Oct-01 25-06-02 04-05-02 04-05-02 04-05-02 25-06-02 25-06-02 Mari Gas Company Ltd. National Power National Power National Power Caltex Oil Pak.(Pvt) Ltd. Shell Gas LPG Pakistan BP Pakistan & Occidental Pakistan Pakistan Oil Field Western Acquisition Western Acquisition BP Pakistan & Occidental Pakistan Attock Oil Company 563.2 364.0 373.0 664.0 5,055.0 175.0 303.0 787.0 782.0 614.0 41.0 9,721.2 28,335.4 Jan-01 Nov-01 Feb-02 Oct-02 Oct-02 Sep-02 Oct-02 Apr-03 Nov-02 Jan-03 Dec-02 MCB Employees-PF & Pension Fund MCB Employees-PF & Pension Fund Listing/Public Offer Stock Exchange Stock Exchange ABAMCO PICIC PICIC Stock Exchange Stock Exchange Stock Exchange 971.6 2,420.0 618.7 1,633.9 12,350.0 620.0 18,614.2 Feb-91 Apr-91 Jun-96 Jul-97 Oct-02 Dec-02 EMG National Group LTV Group Sh. Nahyan bin Mubarik AlNahyan Consortium of Bestway & Abu Dhabi Group Abu Dhabi Group Sale Proceeds Rs (in million) Date of Transfer Buyer Name

Appendix 1.2

219

Telecommunications 30 31 PTCL (2%) PTCL Total Industrial Units Automobile 32 33 34 35 36 37 38 Al-Ghazi Tractors Ltd. National Motors Ltd. Millat Tractors Ltd. Baluchistan Wheels Ltd. Pak Suzuki Co. Ltd. Naya Daur Motors Ltd. Bolan Castings Total Cement 39 40 41 42 43 44 45 46 47 48 49 Maple Leaf Cement Pak Cement White Cement D.G Khan Cement Dandot Cement Garibwal Cement Zeal Pak Cement Kohat Cement Dandot Works - National Cement General Refractories Limited Wah Cement Total Chemical 50 51 52 53 54 55 56 57 58 59 60 61 62 63 National Fibres Ltd Kurram Chemicals Pak PVC Ltd Sind Alkalis Ltd Antibiotics (Pvt) Ltd Swat Elutriation Nowshera PVC Co. Limited Swat Ceramics (Pvt) Limited Ittehad Chemicals Pak Hye Oils Ravi Engineering Limited Nowshera Chemicals National Petrocarbon National Petrocarbon (addl 10% shares) 756.6 33.8 63.6 152.3 24.0 16.7 20.7 38.6 399.5 53.6 6.5 21.2 20.8 2.3 1,610.2 Feb-92 Feb-92 Jun-92 Oct-92 Oct-92 Dec-94 Feb-95 May-95 Jul-95 Jul-95 Jan-96 Apr-96 Jul-96 Mar-02 Schon Group Upjohn Company USA Riaz Shaffi Reysheem EMG Tesco (Pvt) Ltd. Sahib Sultan Enterprises Al_syed Enterprises Empeiral Group Chemi Group Tariq Siddique Associates Petrosin Products Pte Mehboob Ali Manjee Happy Trading Happy Trading 485.7 188.9 137.5 1,972.8 636.7 836.3 239.9 527.9 110.0 18.9 2,635.5 7,790.1 Jan-92 Jan-92 Jan-92 May-92 May-92 Sep-92 Oct-92 Oct-92 Jan-95 Feb-96 Feb-96 Nishat Mills Ltd. Mian Jehingir Ellahi & Ass Mian Jehingir Ellahi & Associates Tariq Sehgal & Associates EMG Haji Saifullah & Group Sardar M. Ashraf D. Baluch Palace Enterprises EMG Shah Rukh Engineering EMG 105.6 150.4 306.0 276.4 172.0 22.3 69.2 1,101.9 Nov-91 Jan-92 Jan-92 May-92 Sep-92 Jan-93 Jun-93 Al-Futain Industries (Pvt) Ltd. UAE Biboo Jee Services EMG Abdul Qadir & Saleem I. Kapoorwala Suzuki Motors Co. Japan Farid Tawakkal & Saleem I. Kapoorwala EMG (10%) 3,032.5 27,525.9 30,558.4 Aug-94 Sep-94 Through Local Stock Exchange Through DR form

220

1.2 continued 64 65 66 67 68 69 70

Engineering Karachi Pipe Mills Pioneer Steel Metropolitan Steel Mills Limited Pakistan Switchgear Quality Steel Textile Machinery Co Indus Steel Pipe Fertilizer 18.9 4.4 66.7 8.9 13.2 27.9 47.4 187.4 Jan-92 Feb-92 May-92 Jun-92 Apr-93 Oct-95 Oct-96 Jamal Pipe Industries M. Usman Sardar M. Ashraf D. Baluch EMG Marketing Enterprises Mehran Industries Hussien Industries

71 72 73

Pak China Fertilizers Company Limited Pak Saudi Fertilizers Ltd. Pak Saudi Fertilizers Ltd. (10%) Total Ghee

435.4 815.0 8,586.3 21.2 152.0 64.3 55.3 15.5 30.1 27.8 47.5 31.9 23.8 8.0 10.2 46.0 19.1 28.5 26.2 18.7 20.1 94.0 27.6 767.8

May-92 Sep-02

Schon Group Fauji Fertilizers Ltd.

7,335.9 May & Sep-02 Fauji Fertilizers

74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

Fazal Vegetable Ghee Associated Industries Sh Fazal Rehman Kakakhel Industries United Industries Haripur Vegetable Oil Bara Ghee Mills Hydari Industries Chiltan Ghee Mills Wazir Ali Industries Asaf Industries (Pvt) Limited Khyber Vegetable Suraj Vegetable Ghee Industries Crescent Factories Vegetable Ghee Mills Bengal Vegetable A & B Oil Industries Limited Dargai Vegetable Ghee Industries Punjab Veg. Ghee Burma Oil E&M Oil Mills Maqbool Oil Company Ltd. Mineral

Sep-91 Feb-92 Apr-92 May-92 May-92 Jul-92 Jul-92 Aug-92 Sep-92 Dec-92 Jan-93 Jan-93 Jan-93 Jan-93 Mar-93 Mar-93 Nov-97 May-99 Dec-96 Jul-02 Jul-02

Mian Mohammad Shah Mehmoob Abu-er-Rub Rose Ghee Mills Mehmoob Abu-er-Rub A. Akbar Muggo Malik Naseer & Assoc. Dawood Khan EMG Baluchistan Trading Co. Treat Corporation Muzafar Ali Isani Haji A. Majid & Co. Trade Lines S. J. Industries EMG Al-Hashmi Brothers Gul Cooking Oil Industries Canal Associates Home Products Intl Star Cotton Corp. Ltd. Madina Enterprises

95 96 97 98

Makerwal Collieries Rice Sheikhupura Faizabad Siranwali

6.1 28.0 21.2 16.2

Jul-95 May-92 May-92 Jul-92

Ghani Group of Industries Contrast Pvt Ld. Packages Ltd. Enkay Enterprises

1.2 Continued 99 Hafizabad 100 Eminabad

20.0 24.1

Sep-92 Nov-92

Pak Pearl Rice Mills Pak Arab Food Industries

221

101 102 103

Dhaunkel Mabarikpur Shikarpur Roti Plants

79.2 14.3 32.5 235.5

Jun-93 Nov-93 Mar-96

Dhonda Pakistan Pvt Ltd. Maktex Pvt) Ltd. Afzaal Ahmad

104 105 106 107 108 109 110 111 112 113 114 115 116 117 118

Gulberg, Lahore Peshawar Head Office, Lahore Hyderabad Faisalabad Bahawalpur Multan Quetta Islamabad Taimuria, Karachi SITE, Karachi Multan Road, Lahore Korangi, Karachi Mughalpura, Lahore Gulshan-e-Iqbal, Karachi Textile

8.7 2.6 10.2 2.6 11.5 1.6 2.5 4.8 3.6 9.2 5.1 3.5 4.1 20.2 90.2

Jan-92 Jan-92 Jan-92 Jan-92 Jan-92 Feb-92 Feb-92 Feb-92 Mar-92 Jun-92 Sep-92 Dec-92 Apr-93 Jun-96 Mar-98

Packages Ltd. Saleem Group of Ind Hajra Textile Mills Utility Stores Corp. Azad Ahmad Utility Stores Corp. Utility Stores Corp. Utility Stores Corp. Utility Stores Corp. Spot Light Printers Specialty Printers Utility Stores Corp. Utility Stores Corp. Pakistan Railways Ambreen Industries

119 120

Quaidabad Woollen Mills Cotton Ginning Factory Total (all Industrial Units) Miscellaneous

85.5 1.2 86.7 20,462.2 18.6 12.5 6.3 110.0 147.4

Jan-93 Jun-95

Jehingir Awan Associates Hamid Mirza

121 122 123 124

National Tubewell Const Corpn Duty Free Shops Republic Motors (Plot) Al Haroon Building Karachi Newspapers

Sep-99 Sep-99 Nov-99 Sep-02

Through Auction Weitnaur Holding Ltd. Muhammad Mushtaq LG Group

125 126 127 128 129

N.P.T Building Mashriq Peshawar Mashriq Quetta Progressive Papers Ltd. Mashriq Karachi Tourism

185.0 26.6 6.2 46.1 6.5 270.4

Oct-93 Jun-95 Jan-96 May-96 Aug-96

Army Welfare Trust Syed Tajmir Shah EMG Mian Saifu-ur-Rahman EMG

130 131 132

Cecil's Hotel Federal Lodges - 1- 4 Dean's Hotel Total Total Total upto 30-6-2003

190.9 39.2 364.0 594.1 1,011.9 101,272.0

Jun-98 Jan-99 Dec-99

Imperial Builders Hussain Global Assoc. Shahid Gul & Partners

222

Appendix 1.3

List of Upcoming Transactions

Company Telecommunications Pakistan Telecom Co Ltd (PTCL) Oil and Gas Pakistan State Oil (PSO) Sui Southern Gas Corp Ltd (SSGCL) Pakistan Petroleum Ltd (PPL) National Refinery Ltd (NRL) Banking and Finance Habib Bank Limited (HBL) National Investment Trust (NIT) Power 51% strategic sale Under review 51% strategic sale 5% Public Offer 51% strategic sale 51% strategic sale 26% strategic sale Type of Sale Envisaged

Karachi Electric Supply Corp (KESC) Faisalabad Electric Supply Co (FESCO) Genco 1 (Jamshoro)
Industry and Real Estate

51-74% shares 56% shares 51% strategic sale

Pakarab Fertilizer Ltd. Pakamerican Fertilizer Ltd. Falettis Hotel Malam Jabba National Construction Ltd. (NCL) Koh-e-Noor Oil Mills

90% sale 90% sale Asset sale Asset sale Sale of shares Asset sale

223

Appendix 3.1
1987 - 1991 MCB Before Privatization
Inputs: Total Assets: X X
2 2

28.6+28.4+32.5+36.3+45.2 = 171
2

X = 171/5 = 34.2

Mean

817.96+806.56+1056.25+1317.69+2043.04 = 6041.5 V(X) = 48.325/5 = 9.665 Variances SD

S = (6041.5 534.2 ) /4 = 48.325 S = 6.95

1997 - 2001 MCB After Privatization

Inputs: Total Assets: X X
2 2

0.150+ 0.150+ 0.159+ 0.332+ 0.187 = 0.978

2 2 2 2 2 2

X = 0.1956

Mean

0.150 + 0.150 + 0.159 + 0.332 + 0.187 = 0.215474 V(X) = 0.0060443/5 = 0.00120886 Variances SD

S = (0.215474 50.1956 ) /4 = 0.0060443; S = 0.077745096

Efficiency = 9.665/0.00120886 = 7995.14 = before/after > 1 => MCB relative performance better after priva than before or efficiency

1987 - 1990 ABL Before Privatization

Inputs: Total Assets: X
2

14.3+16.2+19.1+23.3 = 72.9
2 2 2 2

X = 72.9/4 = 18.225 V(X) = 15.3425/4 = 3.84

Mean

X = 14.3 +16.2 +19.1 +23.3 = 1374.63 2 2 S = (1374.63 418.225 ) /3 = 15.3425 S = 3.92

Variances SD

1996 - 1999 ABL

After Privatization 0.634+0.724+0.894+0.104 = 2.356
2 2 2 2 2

Inputs: Total Assets: X X

2 2

X = 2.356/4 = 0.589

Mean

0.634 +0.724 +0.894 +0.104 = 1.736184 V(X) = 0.1162/4 = 0.03 Variances SD ABL relative performance after privatization better than before or efficiency

S = (1.736184 40.589 ) /3 = 0.1162 S = 0.34 Efficiency = 3.84/0.03= 128 = before/after > 1 =>

224

Appendix 3.2 profit and Loss Account of MCB before Privatization (In rupees)
1987 Mark up/return/interest earned Mark up/return/interest expense Net mark up/interest Fee commission exchange and brokerage income Income from rent Income from sale of investment Dividend income Other income Total Income Expenses Salaries,allowances,and provident fund Rent ,taxes,insurance,lighting etc. Law charges Postages, telegrams and stamps. Auditors' fee Depreciation on and repairs to the banking company's property Stationary printing, advertisment etc. Other expenditures Donations Contribution to staff welfare fund Total expenses Profit for the year before taxation. provision for taxation Current prior year balance Balance brought farward 99200000 -51662952 151821487 93020 151914507 Transfer to reserve proposed dividend Profit for the year 143000000 8641500 237007 106000000 -8790426 129802811 273007 130075818 121000000 8641500 434318 109120593 -27120593 167621998 434318 168056316 155000000 12962250 94066 100000000 -20378294 nil 38482648 94066 38576714 25000000 12962250 nil 614464 339307 66724843 614464 67339307 67000000 146000000 16800288 1151292834 17473251 1241297577 18895479 1366716852 34816688 1554417077 40785029 1809584168 2247813441 1452592066 795221375 325688688 1950212 11632271 1988 2176215890 1323036347 853179543 355654427 2812918 12177438 1989 2269720109 1496323415 773396694 564964067 4222321 5238291 1990 2638307048 1709808151 928498897 581449453 4497900 5154139 1991 3192089572 2114270463 1077819109 659943826 5087622 25948582

637460521 74645231 5869566 23881320 150000 27463718 19664853 152246790 52300 10500000 951934299 199358535

666670339 88796728 9270198 24940754 180000 25535284 18305468 168252921 433500 11900000 1014285192 227012385

744930735 95169453 10401559 30237294 180000 25797395 22135940 175079578 22900 13140000 1117094854 249621998

987299939 95133899 7387179 35416944 180000 28794140 22007213 210947421 28400 8361000 1395556135 158860942

1048004206 137050212 11738725 39964353 180000 32755206 42405567 266627640 6936416 11197000 1596859325 212724843

225

3.2 continued

Muslim Commercial bank Limited Profit and Loss Account for after Privatization 1997 1998 1999 2000 2001 17,034,263 7,544,897 9,489,366 62,064 1,704,944 448,999 2,216,007 7,272,321 868,637 243,994 687,854 400,140 7,723,248 7331623 40000 147 2101176 655164

Mark up revenue Mark up expense Net Mark up provision for diminution of investment provision for non performing loans Bad debts directly written off Total Provision and write off net Mark up after provision fee commission and brokerage income Dividend Income Income from dealing in foreign currency Other Income Total Income Administration Expenses Other provisions Other Charges Profit Before Taxation taxation current taxation prior years taxation deffered Net profit

16,939,966 10,267,190 6,672,776 589,476 806,252 153,804 1,549,532 5,122,088 944,944 31,259 888,769 736,188 7,723,248 5933700 243744 311016 1234788 957720 44457 296385 238782

17,755,988 15,755,990 14,124,265 11,099,850 6,076,138 28,500 144,000 120,130 292,630 5,808,124 922,044 24,290 871,341 646,263 8,517,178 6004561 9750 1310748 947003 650992 -1209758 674533 399180 -210597 568950 39,424 296,568 6,038,454 901,444 40,245 633,137 701,459 8,314,739 7038834 60570 4796 1210539 852186 9,420,968 6,335,022 257,144 7,238,680 6,885,585 46,048 601,799 483,943 1,131,790 5,753,772 909,045 158,909 609,838 1,085,614 8,272,062 7130724 30000 36725 1321795 1083048 -213126 149200 734729

35280 1108176

226

Appendix 3.2 (cont) Profit and Loss Account of ABL before privatization
1986 Total Interest Revenue Interest Expense Net Interest Revenue Other Income Commission & Fees Trading Securities Gain (Loss) on Foreign Exchange Other Income Total Income Administrative Expense Other Charges Provision against non-performing Loans Total Expense Income before tax Taxation Net Income 379794239 65003843 27500000 37503843 458327359 83058444 36900000 46158444 536100485 83172267 33100000 50072267 609980563 87006711 33900000 53106711 838246213 102174899 41000000 61174899 10315 444798082 282662261 97131978 68780 541385803 340302646 118024713 69790 619272752 387823052 148277433 69240 696987274 435498471 174482092 71678 940421112 594191960 244054253 1987 1988 1989 1.297E+09 880659595 416386869 29232428 249592030 1706707 1990 1655157873 1103412084 551745789 72855506 315015340 732799

899898667 1020801001 1097194673 564044272 335854395 20302837 87502786 1127749 630851921 389949080 25019267 123822301 2526375 685760943 411433730 39463680 163577339 4728213

227

Appendix 3.2 Continued P/L Accounts for ABL After privatization (Rs.000)

1996 Total Interest Revenue Interest Expense Net Interest Revenue Other Income Commission & Fees Trading Securities Gain (Loss) on Foreign Exchange Other Income Total Income Administrative Expense Other Charges Provision (write backs) against non-performing Loans Total Expense Income before tax Taxation Net Income 3,534,703 233,869 164,000 69,869 515,000 4,692,220 3,802,172 890,048 405,746 1,185,396 491,449 795,933 3,768,572 3,019,703

1997 5,026,784 4,639,053 387,731 361,322 1,130,242 564,453 1,313,718 3,757,466 2,960,699 32,001 736,000 3,728,700 28,766 15,102 13,664 -

1998 6,059,060 5,289,971 769,089 426,229 1,033,310 755,170 710,238 3,694,036 3,396,440 128,004

1999 7,287,432 6,953,006 334,426 358,997 1,172,024 971,956 1,081,457 3,918,860 3,772,889 128,004 (53,131) 3,847,762 71,098 60,554 10,544

3,524,444 169,592 150,000 19,592

228

Appendix 3.2 Continued Balance Sheets MCB Before Privatization (Rs.000)

1987 cash at hand, state bankand national bank Balance with other banks Money at call and short Notice Total current Assets Investments ( at cost less provisions) Advances Total Intermediate assets Other Assets PremisesLess depreciation Furniture and Fixture less depreciation Other Assets including Silver Total Assets Liabilities and Equities Bills Payable Borrowings from other banks,Agents &cos. Other Liabilities Deposits and Other Accounts Total liabilities Shareholders Equity Issed,subscribed and paid up capital Reserve funds and other Reserves Profit brought forward Total Owner Equity Total Owner Equity and Liabilities 27394075955 576100000 669000000 273007 1245373007 28639448962 27006327099 576100000 790000000 434318 1366534318 28372861417 30977713324 576100000 945000000 94066 1521194066 32498907390 34747154429 43587867275 576100000 970000000 614464 1546714464 576100000 1037000000 339307 1613439307 533829981 2493654554 1775054031 22591537389 563123045 2616457444 1927313471 21899433139 687304838 2836566755 2128948269 25324893462 744181555 4049496898 2262969083 1026787023 4294052888 3237875029 55312919 101160251 1358472917 1514946087 28639448962 59417220 94206545 1384889117 1538512882 28372861417 57450541 88275453 1767546896 1913272890 32498907390 80890561 93511494 2139815304 2314217359 36293868893 45201306582 91853293 97991533 2789395113 2465981998 445612685 1265014411 4176609094 9837276759 13110617022 22947893781 1988 2417589203 393587553 1375497489 4186674245 9551587434 13096086856 22647674290 1989 2596318960 239004890 1210555383 4045879233 10991438501 15548316766 26539755267 1990 3191937581 839288900 273789665 4305016146 1991 5657745448 800016063 1716640000 8174401511

10687540848 13047284777 18987094540 21000380355 29674635388 34047665132

27690506893 35029152335

36293868893 45201306582

229

Appendix 3.2 continued MCB balance Sheets for after privatization 1997 Assets Cash Balance with other banks Money at Call and short Notice Total Current assets lending to Financial Institutions Investment -net Advances -net Total Intermediate term Assets Capital work in Progress Operating Fixed Assets Other Assets Deffered Tax Assets Total Assets Liabilities and Equities Bills Payable Borrowing from Financial Institutions Deposits and other Accounts Other Liabilities Total liabilities Share holders equity share Capital Reserves Unappropriate profit Surplus on revaluation of Assets 1,820,541 1,716,773 387 3,537,701 1248694 4786395 150,095,138 1,820,541 1,796,609 1,136 3,618,286 1,216,416 4,834,700 149,725,757 1820541 2092453 1161 3914155 1188958 5,103,113 2,202,855 2,277,630 3,185 4,483,670 1,109,073 5,592,743 2,423,140 2,278,980 283,940 4,986,060 1,900,962 6,887,022 187,055,394 145,308,743 7,989,205 9,789,998 124,391,460 4,611,819 7,562,164 123,821,807 8,895,267 144,891,057 5292910 8780541 9072090 7,803,443 16,890,675 8,438,055 8,097,178 8,946,624 154,544,451 8,580,119 180,168,372 150,095,138 149,725,757 58,094,728 64,365,285 122,460,013 51,677 3,529,980 9,839,637 57,980,746 62,920,478 20,467 3,559,751 10,428,361 45609297 67432574 50828 3479458 11340754 3,604,356 13,203,910 255,780 158584818 332,366,080 3,659,646 11,400,906 220,500 187,055,394 12801142 548,219 864,470 14,213,831 13559218 788,081 467,655 14,814,954 17669913 3603458 9398536 30,671,907 17,328,837 10,852,094 43,110,947 86,359,139 24,285,589 15,470,519 55,432,235 76,585,999 147,488,753 12571424 4,757,413 21259900 3,025,689 1998 1999 2000 2001

120,901,224 113,041,871 140,322,180

130336164 135,990,147 153481705 169,122,320

158584818 174,715,063

230

Appendix 3.2 continued Balance sheets for ABL before Privatizations

Assets Cash on hand Balance with other banks Money at call and short notice Total Current Assets Investment at cost Advances Premises Furniture and Fixture Other Assets Total fixed Assets Total Assets Liabilities Deposit and other accounts Borrowing from other banks Bills payable Other Liabilities Total Liabilities Capital Issued and subscribed capitals Reserve fund and other reserve Reserve for issue of bonus share Profit Total Capital Total Liabilities and capital

1986 876138336 909345059 11400525 1796883920 3101518341 5616120702 18477295 52344244 862905791

1987 989431736 1067620126 67268386 2124320248 5191386024 6054814297 22431630 61598638 860267475

1988 1220635306 912403861 2183039167 7237633698 5490507467 26387790 69652125 1203617884

1989 1535541904 1694064913 3229606817 6424756884 25224955 81576358 1298241778

1990 1788480216 1073291193 400000000 3261771409 7268407105 25653330 104992195 1542675683

50000000 nil

8087814754 11115241689

9651366373 12190498064 14027798964 15917614729 20056970002 11448250293 14314818312 16210838131 19147221546 23318741411

10058018097 12337440831 14571231598 16637511090 19824866983 254785209 153967210 769329231 373896644 344105532 898006315 422354421 262506866 576403989 694742342 361060586 1056359560 1218670343 588109953 1269371265

11236099747 13953449322 15832496874 18749673578 22901018544 132267725 77800000 1992150 90671 212150546 272227725 87100000 1992150 49115 361368990 272227725 104100000 1992150 21382 378341257 272227725 123300000 1992150 28093 397547968 272227725 143500000 1992150 2992 417722867

11448250293 14314818312 16210838131 19147221546 23318741411

231

Appendix 3.2 continued Balance sheets for ABL After privatization

1996 ASSETS Cash in hand and with State Bank and NBP Balance with other banks Money at call and short notice Total Investments (Rs, 000) 7,195,269 1,627,627 15,552,713

1997 (Rs, 000) 6,316,337 1,380,840 450,000 20,192,699 36,231,357 872,730 6,959,687 72,403,650

1998 (Rs, 000) 7,646,937 1,878,796 100,000 25,605,470 42,719,179 2,488,619 8,919,166 89,358,167

1999 (Rs, 000) 8,601,193 1,757,510 300,000 26,774,766 55,263,762 3,062,045 11,167,055 106,926,331

Total Loans and Advances (net of provisioning) 32,766,263 Fixed Asset Other Assets 901,904 5,395,334 63,439,110 LIABILITIES & OWNER'S EQUITY Total Deposits Borrowings Bills Payable Other Liabilities total liabilities Paid up capital Reserves total owner's equity 55,896,800 4,015,193 548,575 1,589,147 62,049,715 950,797 438,598 1,389,395 63,439,110

63,429,709 4,914,558 802,367 1,741,598 70,888,232 1,063,156 452,262 1,515,418 72,403,650

76,541,153 6,243,517 1,084,151 2,487,440 86,356,261 1,063,156 1,938,750 3,001,906 89,358,167

93,107,291 7,144,163 1,073,491 2,588,936 103,913,881 1,063,156 1,949,294 3,012,450 106,926,331

232

3.2 continued

Financial Statement of UBL

UNITED BANK LIMITED 1998 Earning Assets Rs. 85979751 Total Assets Net Income Interest Margin EBT Provision Net Charge Off Rs.101491125 1999 2000 Rs. 114367602 Rs. 160572595 Rs. Rs. 667092 4759680

RS. In, 000 2001 Rs. 113187063 Rs. 160852206 2002 Rs. 147130367 Rs. 183003466 1414306 5778566

Rs. 105247148 Rs. 117287577 Rs. 139991644 Rs. 154716101 Rs. Rs. Rs. 2690949 1710380 Rs. Rs. 507058 2765878

Rs. (7477876) Rs. Rs. 5060183 Rs. (5741086) Rs. 1488083 Rs. 511950 Rs. 887222 Rs. 134961054 Rs. 78492649 Rs.

(6600551) Rs. 1253058 Rs. (840317) Rs. 352985 Rs. 5866362 Rs. 127133204 Rs. 61238410

Rs.1645497 Rs. 1526964 Rs. 555541 Rs. 6726604 Rs. 129679245 Rs. 74156421

Rs. 2731308 Rs. 851958 Rs. 865498 Rs. 8626252 Rs. 154914619 Rs. 74117401

Rs. 3996700 Rs. 786408

Average Equity Rs. (18531434) Rs. 5531202 Average Deposit Total Loans Rs. 106710654 Rs. 54222928 Rs. 117718301 Rs. 48468324

Source: Annual Reports of UBL for 1997 to 2002.

233

Appendix 3.3 MCB before privatization A:

Transaction Cost of MCB b Staff Cost % Transaction Cost of Allied Bank Of Pakistan

operating cost as % of years 1987 1988 1989

Total Income/

per unit of years t/income/Revenue 1 1 1 1987 1988 1989 24.29 26 26.2

a:

ABL before privatization

b:

Staff Cost %

Total Income/Revenue Revenue for Rs. 1 92 91 91

operating cost as % of Total Income/ per unit of year Total s Income/Revenue Revenue for Rs. 1 years t/income/Revenue 198 6 96 1 1986 28 198 7 96 1 1987 29 198 8 198 9 199 0 199 7 199 8 199 9 200 0 N.A 200 1 N.A

1990 1991 After privatization 1997 1998 1999 2000 2001 MCB before privatization Staff Cost per employee

95 95

1 1

1990 1991

30.24 26.71 After privatization

97 97 96

1 1 1 After privatization

1988 1989 1990

29.72 27.6 29.07

95 95 93 92 89

1 1 1 1 1

1997 1998 1999 2000 2001

22.49 22.32 27.3 27.07 24.22 99.65 98 99.35

1997 1998 1999 2000 N.A 2001 N.A

24.02 26.14 23.25

C years 1987 1988 1989 1990 1991

No. Of Employees

Staff cost P/U of Operating cost %

ABL before privatization c: Staff Cost per employee No. of employees year In Rupees Per Annum s 198 6 198 7 Data is not available in the reports 198 8 198 9 199 0 After privatization 199 7 199 8 199 9 Dta is not available in the reports. 200 0 200 1

In Rupees Per Annum 49627 52556 57791 76511 80423 After privatization 12845 12685 12890 12904 13031 1987 1988 1989 1990 1991

26.51 28.52 28.5 31.79 28.24 After privatization

1997 1998 1999 2000

262810 342355 386539 421850

13610 12858 12557 12133

1997 1998 1999 2000 2001

23.47 26.33 28.85 32.38 30.23

2001 445976 11614 Source: Calculated from annual reports for the said periods.

234

Appendix 3.3
Particulars of provision against Non performing Advances for after privatization of MCB (Pakistani Rupees '000) 1997 Provision Opening Balance Exchange adjustment Change for the Year Amount written off Reversal Intertransfer Closing Balance Provision against Advances to bank Advances to others 1997 provison 4306550 T/Advances % 6.9E+07 6.27 1997 0.48 4E+06 4E+06 3978679 1998 provison T/Advances % 6.7E+07 1998 1.03 5.95 4E+06 1999 0.008 4063386 (Rupees,000) 2000 provison T/Advances % 5.68 2000 0.16 5E+06 9.1E+07 2001 0.07 5.08 6252854 2001 provison T/Advances % 8.3E+07 7.55 1999 provison T/Advances % 7.1E+07 provision for advances/loans as a percentage of total loans/advances. Specific 4306550 3482 144000 -331134 -144219 -566000 566000 3412679 566000 4E+06 3978679 3497386 566000 4063386 4054778 566000 General Total 4E+06 4944 806252 -691648 -1656 Total 3482 144000 -331134 -144219 -5643 -102 1998 Specfic 90452 4306550 3412679 1999 General Total 566000 90452 2000 Specific General Total 566000 99593 1024305 -5643 -144000 -102 -422506 99593 -144000 -422506 503702 4620778 6190556 -503702 62298 6252854 3978679 3497386 2001 Specific -14564 -58304 General Total 566000 4620778 -14564 1704944 -58304 4063386 4054778 1024305 1704944

Percentage of written off against T/advances

235

Appendix 3.3 Continued Particulars of provision of non-performing advances after privatization of ABL
(Pakistani Rupees '000) 1997 2577429 1815 712492 -59949 185312 3417099 -103244 -254985 10597 3070768 -30275 -53131 -35495 2954519 1998 3417099 1301 1999 3070768 2652

3417099

3070768

2954519

provision for advances/loans as a percentage of total loans/advances. 1997 Provision 3417099 T/Advances % 39648456 8.62 Provision 3070768 1998 T/Advances % 45789947 6.72 Provision 2954519 1999 T/Advances % 58218281 5.07

Percentage of write off against T/advances 1997 0.15 1998 0.23 1999 0.05

236

Appendix 3.4 Interest Risk Measurement Before Privatization MCB 1987 Interest and discount or return Interest on deposits borrowing etc. Difference % of net interest income to T/Revenue. 1988 2247813441 2176215890 1452592066 795221375 35.3775523 After privatization Pakistani Rupees in Millions 1997 Interest and discount or return Interest on deposits borrowing etc. Difference % of net interest income to T/Revenue. 16938510 10168048 6770462 39.9708239 1998 17197805 11065063 6132742 35.6600275 ABL Before Privatization (In Pakistani Rupees) 1986 Interest and discount or return Interest on deposits borrowing etc. Difference % of net interest income to T/Revenue. 899898667 564044272 335854395 37.3213571 1987 1020801008 630851921 389949087 38.2003039 After Privatization(Pakistani Rupees in'000) 1998 6059060 5289971 769089 12.6932065 1988 1097194637 685760943 411433694 37.4986971 1989 1297046464 880659595 416386869 32.1026949 1990 1655157873 1103412084 551745789 33.3349343 1999 15755990 9351947 6404043 40.6451324 2000 14124242 7238680 6885562 48.7499577 2001 17033225 7544897 9488328 55.704824 1323036347 853179543 39.204729 1989 2269720109 1496323415 773396694 34.0745403 1990 2638307048 1709808151 928498897 35.192981 1991 3192089572 2114270463 1077819109 33.7653153

1997 Interest and discount or return Interest on deposits borrowing etc. Difference % of net interest income to T/Revenue. 5026787 4639053 387734 7.71335646

1999 Data not 7287432 available 6953006 334426 4.58907884

2000

2001

237

Appendix 3.4 continued

Capital Risk of MCB Before Privatization

1987 Advances Capital* % 0f total capital to T/Loans 13110617022 12739027561 97.16573629

1988 13096086856 3982991762 30.41360221

1989 15548316766 4357760821 28.02721919 Capital Risk of MCB After Privatization

1990 2757663780 5596211362 202.9330552

1991 3733992169 5907492195 158.2084784 (Rs.In, OOO)

1997 Advances Capital* % 0f total capital to T/Loans 64365285 14576393 22.6463582

1998 62920478 12396864 19.70243138

1999 67432576 12693535 18.82403988

2000 86359139 22483418 26.03478712

2001 76585999 15833646 20.674335

ABL Befor privatization (in Rupees) 1986 Advances Capital* % 0f total capital to T/Loans 5616120702 464943602 8.278732361 1987 6054814297 733273484 12.11058586 ABL after privatization (000) 1998 42719179 9245423 21.6423237 1988 5490507467 798703528 14.5469892 1989 8087814754 1092290310 13.5053824 1990 11115241689 1636393210 14.72206593

199 Advances Capital* % 0f total capital to T/Loans 36231357 6429976 17.74699192

1999 55263762 10156613 18.37843215

238

Appendix 3.5 1987 Assets Shareholders contribution to T/Assets % of Shareholders to T/Assets 36720602828 12739027561 2.882527936 1988 37235514464 3982991762 9.348629545 After Privatization (000) 1997 Assets Shareholders contribution to T/Assets % of Shareholders Contribution to T/Assets 150095138 14576393 10.29713853 1998 149725757 12396864 12.07771231 AbL Brfore Privatization ( In rupees) 1986 Assets Shareholders contribution to T/Assets % of Shareholders Contribution to T/Assets 13725521165 464943602 29.52083028 1987 17495291259 733273484 23.85916256 After Privatazation(000) 1997 Assets Shareholders contribution to T/Assets % of Shareholders Contribution to T/Assets 1569897 6429976 0.244152855 1998 1937514 9245423 0.209564668

Capital adequacy ratios MCB before Privatization 1989 39572596150 4357760821 9.080947251 1990 43590210123 5596211362 7.789235842 1991 55819696091 5907492195 9.448966541

1999 158584818 12693535 12.49335335

2000 174715063 22483418 7.770840848

2001 187055394 15833646 11.81379159

1988 21409793271 798703528 26.80568261

1989 27372345626 1092290310 25.05958844

1990 34203739405 1636393210 20.90190744

1999 2063418

2000

2001

10156613 data not avaialable. 0.20316005

239

3.5 Continued Capital Capital to Risk weighted assets Public sector comm.banks Domestic private banks Foreign banks specialized banks All Banks Adequacy Ratios 2000 2001 10.4 9.2 18 -3.3 9.7 9.6 9.5 18.6 -13.9 8.8

2002 12.3 9.7 23.2 -31.7 8.8

Source State bank Report for 2002

240

Appendix 3.5

Liquidity Management MCB befor Privatization 1987 2911594683 4428245822 65.75052064 1988 4176609094 4848430143 86.14353452 After privatization 1998 14347299 28791970 49.83090424 Before privatization 1987 16220808034 22591537389 71.80037266 1988 16260343846 21899433139 74.25006731 After privatization 1998 1989 18475132958 25324893462 72.95246073 1990 19768408888 27690506893 71.39056343 1991 2.7355E+10 3.5029E+10 78.0932613 1989 2835323850 5745813777 49.34590573 1990 4031226481 6355700033 63.42694684 1991 6457761511 8896130809 72.5906762

a: cash as ratio of demand deposit years Cash* Demand deposit % of cash for demand deposit

years Cash Demand deposit % of cash for demand deposit

1997 13349361 45613941 29.26596717

1999 21273371 27293325 77.94349351

2000 17328837 28858208 60.04820881

2001 24285589 33859944 71.7236538

b:Liquid funds/total deposits years Liquide Funds** Total Deposit % of total deposit to liquid funds

years

1997

1999

2000

2001

241

Liquide Funds Total Deposit % of total deposit to liquid funds c:liquid funds/total assets years Liquide Funds Totl Asseta % of total assets to liquid assets.

177059310 124391460 142.3404066

176911444 123821807 142.8758377 Before privatization 1988 16260343846 37235514464 43.66891147 After privatization 1998 176911444 149725757 118.1569875

165091754 130336164 126.6661139

142583756 135990147 104.8485932

190376686 154544451 123.185714

1987 16220808034 36720602828 44.17358863

1989 18475132958 39572596150 46.68668411

1990 19768408888 43590210123 45.35057031

1991 2.7355E+10 5.582E+10 49.0067295

years Liquide Funds Totl Asseta % of total assets to liquid assets.

1997 177059310 150095138 117.9647205

1999 165091754 158584818 104.1031267

2000 142583756 174715063 81.60930921

2001 190376686 187055394 101.775566

242

Annexure 3.5 continued.

Liquidity Management ABL befor Privatization 1986 1785483395 2269242718 78.6819048 1987 2057051862 2908723717 70.7200842 After privatization 1988 2133239167 3626813967 58.81854395 1989 3229606817 4412722328 73.1885348 1990 2861771409 5198435940 55.05062373

a: cash as ratio of demand deposit years Cash* Demand deposit % of cash for demand deposit

years Cash* Demand deposit % of cash for demand deposit b:Liquid funds/total deposits years Liquide Funds** Total Deposit % of total deposit to liquid funds years Liquide Funds** Total Deposit % of total deposit to liquid funds c:liquid funds/total assets years Liquide Funds Totl Asseta % of total assets to liquid assets. years Liquide Funds** Totl Asseta % of total deposit to liquid funds

1997 7697177 28053561 27.43743299

1998 9525733 24882487 38.2828814

1999 14240438 36615111 38.89224315 Before privatization

1986 5831488410 10058018097 57.97850385 1997 40036918 63429709 63.12013508

1987 2.8047E+10 1.2337E+10 227.332936 1998 98251294 76541153 128.364011 Before privatization

1988 20832769682 14571231598 142.9719207 After privatization 1999 55620179 93107291 59.73772666

1989 2.1864E+10 1.6214E+10 134.845435

1990 24357915814 19824866983 122.8654691

1986 5831488410 13725521165 42.48646255 1997 40036918 72403560 55.29689148

1987 2.8047E+10 1.7495E+10 160.312086 After privatization 1998 98251294 89358167 109.952226

1988 20832769682 21409793271 97.30486146 1999 55620179 Data is not 106926331 available 52.01728936

1989 2.1864E+10 1.7742E+10 123.233983

1990 24357915814 21645420203 112.531499

243

Appendix 3.6 Earning and profitability a:Return on assets Earning and Profitability for MCB before privatization

a: income/assets Years Income(before tax) T.Assets % of income to assets Years Income(before tax) T.Assets % of income to assets 1987 199358535 35205656741 0.566268473 1997 1234788 150095138 0.822670219

MCB before privatization 1988 227012385 35697001582 0.635942446 1998 947003 149725757 0.632491709 1989 249621998 39572596150 0.630795101 After privatization (Rs.000) 1999 1210539 158584818 0.763338518 2000 1321795 174715063 0.756543241 2001 2101176 187055394 1.123290783 1990 158860942 43590210123 0.36444179 1991 212724843 55819696091 0.3810928

b:return on equity Years Income (before tax) Capital* % of income to capital Years Income (before tax) Capital* % Of income to capital a: income/assets Years Income (before tax) Assets ROA 1986 37503843 13725521165 0.273241668 1987 199358535 12739027561 1.564943117 1997 1234788 14576393 8.471149207

MCB before privatization 1988 227012385 3982991762 5.699544427 1998 947003 12396864 7.639052909 ABL before privatization 1987 46158444 17495291259 0.263833527 ABL after privatization 1988 50072267 21409793271 0.233875528 1989 53106711 27372345626 0.19401593 1990 61174899 34203739405 0.178854418 1989 249621998 4357760821 5.728217042 After privatization (Rs.000) 1999 1210539 12693535 9.536657834 2000 1321795 22483418 5.87897712 2001 2101176 15833646 13.27032321 1990 158860942 5596211362 2.838723053 1991 212724843 5907492195 3.60093312

244

Years Income (before tax) Continued 3.6 Assets ROA b:Return on equity years income(before tax) Capital* ROE years income(before tax) Capital* ROE

1997 28766 1569897 1.832349511

1998 169592 1937514 8.753072236 ABL before privatization

1999 71098 2063418 3.445642134

2000

2001

1986 37503843 464943602 8.066320913 After privatization 1997 28766 6429976 0.447373365

1987 46158444 733273484 6.294847012 1998 169592 9245423 1.834334676

1988 50072267 798703528 6.269193167 1999 71098 10156613 0.700016826

1989 53106711 1092290310 4.861959363 2000

1990 61174899 1636393210 3.738398487 2001

245

Appendix 4.1 Inflows of foreign investment in Pakistan

In million As % of Total US $ years FDI Portfolio Total FDI Portfolio Total 1984-85 70.30 23.40 93.70 75.0 25.0 100.0 1985-86 145.20 16.00 161.20 90.1 9.9 100.0 1986-87 108.00 21.00 129.00 83.7 16.3 100.0 1987-88 162.00 10.50 172.50 93.9 6.1 100.0 1988-89 210.20 7.20 217.40 96.7 3.3 100.0 1989-90 216.20 -4.70 211.50 102.2 -2.2 100.0 1990-91 246.00 -9.00 237.00 103.8 -3.8 100.0 1991-92 335.10 218.50 553.60 60.5 39.5 100.0 1992-93 306.40 136.80 443.20 69.1 30.9 100.0 1993-94 354.10 288.60 642.70 55.1 44.9 100.0 1994-95 442.40 1089.90 1532.30 28.9 71.1 100.0 1995-96 1101.70 205.20 1306.90 84.3 15.7 100.0 1996-97 682.10 267.40 949.50 71.8 28.2 100.0 1997-98 601.30 221.30 822.60 73.1 26.9 100.0 1998-99 472.30 27.30 499.60 94.5 5.5 100.0 1999-2000 423.70 54.6 478.30 88.6 11.4 100.0 Source. Economic survey of Pakistan 2002-2003.

246

Appendix No 4.2

Years

X No. Of Deposits

Y Investment 32261.8 45033.5 38572.3 49056.1 60230.4 87273.6 85882.1 85303.9 81226.1 120021 192185.5 208043.1 267805.2 268794.3 322875.8 375286.2 420830.2 350326.2 338796.6 303782.4 3733586.3

X2

y2

XY

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total

18251389 19565836 20488157 21215465 21720814 22578568 23947814 25140528 26756571 30993837 27106754 27973622 29520563 31085736 31723719 32271603 29772355 29710720 28409347 28043818 526277216

3.33113E+14 3.82822E+14 4.19765E+14 4.50096E+14 4.71794E+14 5.09792E+14 5.73498E+14 6.32046E+14 7.15914E+14 9.60618E+14 7.34776E+14 7.82524E+14 8.71464E+14 9.66323E+14 1.00639E+15 1.04146E+15 8.86393E+14 8.82727E+14 8.07091E+14 7.86456E+14 1.42151E+16

1040823739 2028016122 1487822327 2406500947 3627701084 7616681257 7375735100 7276755355 6597679321 14405040441 36935266410 43281931458 71719625147 72250375712 1.04249E+11 1.4084E+11 1.77098E+11 1.22728E+11 1.14783E+11 92283746550 1.03003E+12

5.88823E+11 8.81118E+11 7.90275E+11 1.04075E+12 1.30825E+12 1.97051E+12 2.05669E+12 2.14459E+12 2.17333E+12 3.71991E+12 5.20953E+12 5.81972E+12 7.90576E+12 8.35567E+12 1.02428E+13 1.21111E+13 1.25291E+13 1.04084E+13 9.62499E+12 8.51922E+12 1.07401E+14

r=

xy - ( x) ( y) / n ( x ( x ) / n)( y ( y )
2 2 2

/ n)

n in=1 XY - in=1 X in=1 Y n in=1 X 2 ( in=1 X ) 2

2=1-

n ei2

Y
i =1

( in = 1Yi ) 2 n

i =1

247

Appendix No 4.3

Years 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total

X (No of Deposits) 18251389 19565836 20488157 21215465 21720814 22578568 23947814 25140528 26756571 30993837 27106754 27973622 29520563 31085736 31723719 32271603 29772355 29710720 28409347 28043818 526277216

Y (Investment) 32261.8 45033.5 38572.3 49056.1 60230.4 87273.6 85882.1 85303.9 81226.1 120021 192185.5 208043.1 267805.2 268794.3 322875.8 375286.2 420830.2 350326.2 338796.6 303782.4 3733586.3

X2 3.33113E+14 3.82822E+14 4.19765E+14 4.50096E+14 4.71794E+14 5.09792E+14 5.73498E+14 6.32046E+14 7.15914E+14 9.60618E+14 7.34776E+14 7.82524E+14 8.71464E+14 9.66323E+14 1.00639E+15 1.04146E+15 8.86393E+14 8.82727E+14 8.07091E+14 7.86456E+14 1.42151E+16

Y2 1040823739 2028016122 1487822327 2406500947 3627701084 7616681257 7375735100 7276755355 6597679321 14405040441 36935266410 43281931458 71719625147 72250375712 1.04249E+11 1.4084E+11 1.77098E+11 1.22728E+11 1.14783E+11 92283746550 1.03003E+12

XY 5.88823E+11 8.81118E+11 7.90275E+11 1.04075E+12 1.30825E+12 1.97051E+12 2.05669E+12 2.14459E+12 2.17333E+12 3.71991E+12 5.20953E+12 5.81972E+12 7.90576E+12 8.35567E+12 1.02428E+13 1.21111E+13 1.25291E+13 1.04084E+13 9.62499E+12 8.51922E+12 1.07401E+14

r=

xy - ( x) ( y) / n ( x ( x ) / n)( y ( y )
2 2 2

/ n)

n in=1 XY - in=1 X in=1 Y n in=1 X 2 ( in=1 X ) 2

n ei2
2 =1n

Yi
i =1

( in = 1Yi ) 2 n

i =1

248