BANKING INDUSTRY IN PAKISTAN

A bank is a place where they lend you and shadow in fair weather and ask for it
back when it begins to rain.
Robert Frost
Banking sector is always a very important sector for every economy. Same is the
case with Pakistan. Banks perform various duties which are dissimilar in nature. The
primary and most important duty is to provide a safeguard for national assets.
Other functions include profit making from the public funds (on interest rates) and
lending of money to the borrowers. The whole of the economy and financial
transactions are carried out through banking institutions these days. Banking
system in Pakistan is one of the sectors, which have developed a lot in the past few
years. Pakistan today has an very good banking network in all over the Pakistan
comprising of a State Bank , which is a federal entity and has a central role in the
banking sector of Pakistan. State bank has a very wide range of various private and
national commercial and other banks that deal in specific areas such as consumer
finance, agriculture and other financial institutions. State bank also regulate
banking sector through its policies and physical inspection. However Banking
System of Pakistan has adopted rough and tough policies.
Pakistan on the time of its creation i.e. in 1947 did not have an good banking
system in it. Pakistani banking sector portrayed a marvelous performance in first
two decades and got a good banking system. State Bank of Pakistan was
constituted on 1st July 1948. The role of central bank is to regulate , observe and
monitor and control the activities and all operations of all the commercial banks in
Pakistan. State bank of Pakistan has many a set of regulations which are to be
followed by all other banks in the country these regulations are called Prudential
Regulations. Prudential Regulations are updated time to time to ensure the
implementation of the current scenario..
Other important banking decisions such as discount rates and minimum reserves
which must be maintained by every bank are also made by the state bank of
Pakistan. State bank also hold the federal reserve of the county and also lends
money to the government and other commercial banks in the country. One of the
bad patch in the history of Pakistani banking industry was the zulifqar Ali Bhuttos
era. He decided to nationalize all the private banks. After nationalization of banks
their efficiency was severely affected. They became the victims of political
interference and pressures. This became a reason of the lowering nations currency
of Pakistan and due to the devaluation in the currency balance of payments was
severely hurt.
Now Pakistani banks are prospering and providing very good customer services to

its customers like online banking and mobile banking etc. ATM cards and debit and
credit cards have entirely changed the banking experience in the country. Now there
are more private banks than government banks and they all are working well.
Pakistan has the one of worlds strongest banking system which has a sound stand
from the recent world crisis of banking system in America and other European
countries.
The strongest bank in the United States will survive only so long as the people will
have sufficient confidence in it to keep their money there.
story of Banking in Pakistan starts from the partition of Indo-Pakistan sub continent
in August,1947. At that time, the areas consisting Pakistan had 631 offices of 45
scheduled banks out of which 487 were located in West Pakistan and 114 in East
Pakistan which Was also served by 500 office of small and non-scheduled banks.
There were 19 branches of foreign banks in Pakistan but they had a very limited role
to play.
Just after the partition, the Indian bankers started immigrating and shifting the head
offices of their banks and capital to India. It caused a great set back to
the banking field in Pakistan, and resulted in decline in the number of offices
in schedule bank from 631 to 195 by 30th June, 1948. The West Pakistan the
number fell from 487 to 81 in East Pakistan from 144 to 69 by 30th June, 1951.
Among these Habib Bank Ltd., with 25 offices and Australia Bank Ltd. with 19 offices
were institutions run by muslims who shifted their head offices to Pakistan.
The technical and administrative difficulties of establishing a central bank just after
independence compelled Pakistan to enter into an agreement with the Reserve
Bank of India by which the bank was to perform the function of a central bank in this
area also upto 30th September, 1948. The Reserve Bank of India started following
wrong policies against the interest of Pakistan. The situation became so grave that
after the consultation of two government the Reserve Bank of India was asked to
finish the agreement from 30th June instead of from 30th September,1948. So the
Government of Pakistan decided to establish the State Bank of Pakistan as its
central bank from 1st July, 1948. In the same year first Pakistani notes in the
denomination of Rs.5, 10, and 100 were issued and Indian currency was withdrawn
from circulation. After it the government was advised to a bank which should serve
as a agent of State Bank of Pakistan. On this suggestion National Bank of Pakistan
which was established in 1949 to finance jute trade in East Pakistan to take over the
agency functions from the Imperial Bank of India. Furthermore banking companies
control act 1949 was promulgated which empowered the State Bank of Pakistan to
control the operation of other banks. To boost the economic development the State
Bank of Pakistan encourage the commercial banks and gave them schemes to
advance in the agricultural and industrial fields. In addition to this specialize
financial institutions were set up to meet the acute shortage of funds in these

fields.
The State Bank of Pakistan's policy encouraged expansion in established banks,
establishment of new banks, and weeding out of unsound banks just to faster the
growth of banking system in the country. This policy not only established
the banking system by 1965 but increased its functional efficiency, scope of
operations and soundness to a great extent and the
following banking structureemerged:
1. STATE BANK OF PAKISTAN (CENTRAL BANK)
2. COMMERCIAL BANKS.
3. SAVING BANKS
4. CO-OPERAT1VE BANKS
5. EXCHANGE LANES
6. SPECIALIZED FINANCIAL INSTITUTIONS
There are two types of the COMMERCIAL BANKS
1. Scheduled
2. Non-scheduled banks
According to the State Bank of Pakistan Act,1956 a bank having a paid up capital
and a reserve of rupees five lacs and fulfilling certain other requirements can be
scheduled with the State Bank of Pakistan. With the opening of the State Bank of
Pakistan and the keen interest which it took in the establishment of the
sound banking system in Pakistan despite the separation of the East Pakistan,
commercial banking made a tremendous progress which can be judged from the
following figures. Offices of the following 14 banks (scheduled) increased from 195
to 1948 to 3600 with 71 branches outside Pakistan in 1972, deposits from 88 Crores
in 1948 to 1900 crores in 1972 and advances from 20 crores in 1948 to 1250 crores
in 1972.
1. National Bank of Pakistan
2. Habib Bank Ltd.
3. Habib Bank (Overseas) Ltd.
4. United Bank Ltd.

5. Muslim Commercial Bank Ltd.

6. Commerce Bank Ltd.
7. Australasia Bank Ltd.
8. Standard Bank Ltd.
9. Bank of Bahawalpur Ltd.
10.Premier Bank Ltd.
11.Pak Bank Ltd.
12.Sarhad Bank Ltd.
13.Lahore Commercial Bank Ltd.
14.Punjab Provincial Co-operative Bank Ltd.
On January 1, 1974 the Government of Pakistan nationalize all the Pakistani
scheduled banks including State Bank of Pakistan, industrial Bank of Pakistan,
Agricultural Development Bank of Pakistan through the bunk- nationalization act,
1974 to achieve the desired objectives. The weaker commercial banks were merged
with stronger ones and in all five major banking companies were formed.
1. NATIONAL BANK OF PAKISTAN
2. HABIB BANK LIMITED
3. UNITED BANK LIMITED
4. MUSLIM COMMERCIAL BANK LIMITED
5. ALLIED BANK OF PAKISTAN
The Federal Government also set up a Pakistan Banking Council on March 21, 1974
to look after the organizational and operational matters including evaluation and
progress of the nationalized commercial banks. The State Bank was to provide the
overall policy guidelines to commercial banks.

HISTORICAL RUNDOWN
With the triggering of the Occupy Wall Street and similar protests in the
developed world, the chorus of voices protesting against the global
financial system has become a cacophony. And in this moment of popular

opposition, banks have come under fire for reckless lending, exorbitant
payouts to CEOs and for availing massive taxpayer-funded bailouts.
But are banks in Pakistan also exhibiting symptoms of similar financial malaise
caused by extensive liberalization, as are their counterparts in the West? Not quite.
Pakistans experience with financial liberalization in the banking sector is vastly
limited as compared to the developed world. A brief look at the history of banking in
Pakistan reveals that the banking sector has made impressive achievements but
still has a long way to go.
Humble beginnings, 1947 1970
Our financial sector evolved very differently from banks in the developed world. For
nearly a year after partition, Pakistan had no central bank. Habib Bank established
in 1941 filled this gap initially, until the State Bank of Pakistan (SBP) was set up in
1948 under quasi-government ownership. The role of domestic banks was
particularly limited at the time, accounting for only 25 of the total 195 bank
branches in the country. Therefore, the SBP was initially mandated to develop
commercial banking channels, and maintain monetary stability so trade and
commerce could flourish in the newly-created state. Subsequently, Habib Bank,
Allied Bank and National Bank were amongst the first to start operations with strong
support from the central bank.
A legacy of public control, 1970 1980
Commercial banking grew favorably in Pakistan until 1974. Under the
nationalization policy implemented by Zulfikar Ali Bhuttos government, thirteen
banks were brought under full government control, and consolidated into six
nationalized banks. The Pakistan Banking Council was set up to monitor nationalized
banks, marginalizing the SBPs role as a regulator. These measures were meant to
improve lending to prioritized industries. However, while directed lending was
viewed favorably at the time, little can be said of the long-term gains that have
been achieved.
Business as usual, 1980-1990
Over time, the financial sector grew to serve primarily large corporate business,
politicians and the government. Board of Directors and CEOs were not
independently appointed. Lending decisions were not always commercially
motivated, and many billions of rupees were unsurprisingly funneled out of the
financial system as bad loans. Banks were essentially not in control of their
destinies during this period.
Privatization, 1990 1997
By 1991, the Bank Nationalization Act was amended, and 23 banks were established
of which ten were domestically licensed. Muslim Commercial Bank was privatized

in 1991 and the majority ownership of Allied Bank was transferred to its
management by 1993. By 1997, there were still four major state-owned banks, but
they now faced competition from 21 domestic banks and 27 foreign banks. More
importantly, administered interest rates were streamlined, bank-wise credit ceilings
removed and a system of auctioning government securities was established, forcing
the government to borrow at market determined rates.
Ushering in the reforms, 1997 2006
After privatization, transformational reforms were pushed through. The central
banks regulatory powers were restored via amendments to the Banking Companies
Ordinance (1962) and the State Bank of Pakistan Act (1956). Subsequently,
corporate governance, internal controls and bank supervision was strengthened
substantially. Legal impediments and delays in recovery of bad loans were
streamlined in 2001. Furthermore, the scope of prudential framework set up in 1989
was enhanced, allowing banks to venture into hitherto untapped business
segments. Lending to small and medium enterprise had previously been neglected,
whereas consumer and mortgage finance had not developed prior to reforms.
The post-reform era, 2006 present
Buoyed by the spirit of liberalization, the sectors landscape has changed
significantly. By 2010, there were five public commercial banks,25 domestic private
banks, six foreign banks and four specialized banks. There are now 9,348 bank
branches spread throughout the country, catering to the needs of some 28 million
deposit account-holders.
Banking in Pakistan the long journey ahead
Much still remains to be accomplished. In the absence of sustainable economic
growth, banks will remain vulnerable to business cycle fluctuations. As recently as
2008, non-performing loans increased sharply in response to the preceding years of
easy credit and risky consumer lending practices.
Moreover, strong regulation will continue to be required so as to maintain the
delicate balance between industry concentration and competition. Presently, the top
five banks account for about 50% of the sector, measured in terms of total
advances.
Finally, the benefits of financial liberalization must trickle down to the common man.
Banks are proactively exploring new business models to make this happen such as
branchless banking. But more headway needs to be made before existing
deployments such as Tameer Banks Easypaisa or UBL Omni reach a critical mass
of users.

Reforms have helped banks come a long way, but unless the central bank remains
autonomous, and continues to err on the side of caution, liberalization may quickly
become a bitter pill to swallow.