Privatization of Banking Sector in Pakistan: (A Case Study of MCB & ABL)

Privatization of Banking Sector in Pakistan
(A Case Study of MCB & ABL)
Ph.D. Dissertation
Submitted to Researcher
Prof. Dr. Bahadar Shah Bakhtiar Khan
Supervisor
Department of Public Administration

Gomal University, Dera Ismail Khan
N.W.F.P. Pakistan
Table of Contents
Page No
Abstract i
Acknowledgements ii
List of Tables iii
List of Figures v
Appendix List vi
Introduction viii
Chapter: 1 Introduction
1. Description of the Study 1
1.1 Privatization 1
1.2. Types and Techniques of Privatization 3
1.3. Privatization process in Pakistan 4
1.4. Steps in Privatization in Pakistan 8
1.4.1 Identification 10
1.4.2 Hiring of Financial Advisor 10
1.4.3 Due Diligence 10
1.4.4 Enacting any needed regulatory a sectoral reform 11
1.4.5 Valuation of property 11
1.4.6 Pre-Bid and Bid Process 12
1.4.7 Post-Bid Matters 12
1.5 General Objectives of Privatization 13
1.6. Modalities of Privatization in Pakistan 14
1.7. Implications of Bank Privatization 15
1.8. Privatization of Banks 17
1.9. Privatization of Banks in Pakistan 18
1.9.1 Muslim Commercial Bank Limited. 20
1.9.2. Allied Bank Limited 21
1.9.3 Overview 24
1.9.4 Historical Background 24
1.9.4.1 Pre- Nationalization Stage 24
1.9.4.2 Nationalization Stage 26
1.9.4.3 Privatization Stage 28
1.10. Objectives of Privatization of Banks 33
1.11. Scope of the Study 34
1.12 Objectives of Study 35
1.13. Methodology 36
Chapter: 2 Literature Review
2.1 Introduction 42
2.2 Privatization of Banks and its Efficiency 42
2.3 Privatization of Banks and its impact on Economy 45
2.4 Privatization of Banks and its impact on Employees 46
2.5 Privatization of Banks and its impact on Customers 48
2.6 Privatization of Banks and Regulation 48
Chapter 3: Privatization of Banks and Its Impact on Efficiency
3.1 Introduction 49
3.2 Data Envelope Analysis 54
3.3 Efficiency gains of two banks, MCB & ABL 57
3.3.1 Transaction Cost 57
3.3.2 Asset Quality 59
3.3.3 Risk Measurement 61
3.3.4 Interest Rate Risk 62
3.3.5 Capital Risk 62
3.3.6 Capital Adequacy Measurement 63
3.3.7 Interest Rate Spread 64
3.3.8 Intermediation Proxies 68
3.3.9 Management Competence 69
3.3.10 Earning and Profitability 70
3.3.11 Liquidity Management 71
3.4. Comparative study of Private vs. Public Bank 73
3.4.1 Introduction 73
3.4.2 Ratio used in Analysis 74
3.4.3 Earning Assets to Total Assets 74
3.4.4 Return on Earning Assets 74
3.4.5 Interest Margin to Total Assets 74
3.4.6 Loan Loss Coverage Ratio 75
3.4.7 Equity Capital to Total Assets 75
3.4.8 Deposit Time Capital 76
3.4.9 Loans to Deposits 76
3.5 Findings 83
3.6 Conclusion 84
Chapter 4: Privatization and its Impact on Economy
4.1 Introduction 89
4.2 Privatization of Banks and its Impact on Economy 91
4.3 Hypotheses 94
4.4 Investment 95
4.4.1 Effect of Freezing of Foreign Currency Accounts 96
4.4.2 Effects of Nuclear Tests on Investment 96
4.4.3 Role of Banks Intermediating Foreign Capital Inflows 97
4.4.4 Hesitation on the Part of Foreign Investors 97
4.4.5 Pakistan Financial Markets Efficiency 97
4.4.6 Liberalization in Pakistan to Ensure Inflow of FDI 98
4.4.7 Modes of Financing in Pakistan 99
4.4.8 Deposits 99
4.5 Test of Sub-hypothesis No 1 101
4.5.1 Results of Sub-hypothesis No. 1 102
4.5.2 Findings 103
4.6 Test of Sub-hypothesis No. 2 104
4.6.1 Results of Sub-hypothesis No. 2 105
4.6.2 Findings 106
4.7 Impact of MCB & AQBL on Economic Growth 106
4.8 Privatization and Fiscal Deficit 107
4.9 Conclusion 109
Chapter 5: Privatization of Banks and its Impact on Employment
5.1 Introduction 111
5.2 Does Privatization Affect Labor? 111
5.3 Characteristics of Labor Market in Pakistan 114
5.3.1 Overstaffing 114
5.3.2 Generous Pay and Benefits 114
5.3.3 Labors Union Influence 115
5.4 Privatization Employment Impact 115
5.5 Labor Force Reduction 116
5.6 New Jobs Creations 119
5.7 Factors, which will determine the extent of that impact 120
5.8 Protection of the Interest of the Workers 120
5.9 Findings 129
5.10 Conclusion 130
Chapter 6: Privatization of Banks and its Impact on Customers
6.2 Characteristics of Commercial Banks in Pakistan 132
6.3 Customer’s Problems 133
6.4 Challenges faced by Commercial Banking in Pakistan 133
6.5 Emergence of New Products 135
6.5.1 Consumer Financing 135
6.5.2 Consumer Financing Products 136
6.6 Impact on Customers 138
6.7 Conclusion 144
Chapter 7: Regulatory Environment for Privatization of Banks
7.2 Regulatory Reforms 147
7.3 Pre-Privatization Activities 147
7.4 State Bank of Pakistan 152
7.5 Legislative Agenda 153
7.5.1 Banking and Financial Sector 153
7.6 Conclusion 177
Chapter 8: Summary and Conclusion
8.1 Summary and Conclusion 179
8.2 Bank Privatized so far 183
8.3 Achievements of the Study 184
8.4 Conclusion 187
8.5 Implications of the Study 191
8.6 Recommendations 192
8.7 Suggestions for Further Research 193
Bibliography
Appendixes
List of Tables
Page No
Chapter 1:
1.1 Number of Privatized Transactions in Pakistan 6
1.2 Pre privatization Structure of Banking Sector 19
1.3 Information on Banking Privatization 32
1.4 Information on Banking Privatization, Classified by Offering Types 33
1.5 Research Paradigm 41
Chapter 3:
3.1 Summary measures for Efficiency MCB Before Privatization 55
3.2 MCB After Privatization 55
3.3 ABL Before Privatization 56
3.4 ABL After Privatization 56
3.5 Transaction Cost 58
3.6 Risk Management 62
3.7 Capital Risks 63
3.8 Capital Adequacies 64
3.9 Intermediation Proxies 68
3.10 Management Competency 70
3.11 Earning and Profitability 71
3.12 Liquidity Indicators 72
3.13 Ratios for MCB 77
3.14 Percentage Change in Ratios 77
3.15 Ratios for ABL 78
3.17 Ratios for UBL 79
3.19 Comparisons 81
3.20 Financial Indicators of MCB 82
3.21 Financial Indicators of ABL 82
Chapter 4:
4.1 Data for Sub-hypothesis No. 1 101
4.2 Data for Sub- hypothesis No. 2 104
4.3 Performance of MCB for Pre and Post Privatization Periods 106
4.4 Performance of ABL for Pre and Post Privatization Periods 106
4.5 Fiscal Indicators 108
Chapter 5:
5.1 Bid Values and Payments on Gold Handshake Scheme 118
5.2 Growth Rate of GDP, Investment and Employment 118
5.3 Number of Employees, Pre and Post Privatization of MCB 123
5.4 Number of Branches Pre and Post Privatization of MCB 124
5.5 Annual Operating Cost Pre and Post Privatization of MCB 125
5.6 Number of Employees, Pre and Post Privatization of ABL 126
5.7 Number of Branches, Pre and Post Privatization of ABL 126
5.8 Annual Operating Cost Pre, and Post Privatization of ABL 127
5.9 Structure of Banking Sector in Pakistan, Pre and Post Privatization 128
Chapter 6:
6.1 Details of Consumer’s Products 136
6.2 Distribution of ATM (in numbers) 138
6.3 Consumer’s Knowledge about privatization of Banks 139
6.4 Changes in Bank Employees’ Behavior 141
6.5 Consumer Awareness about Bank’s New Products and Services 142
6.6 Costumer Views about Operation of New Products and Services 143
Chapter 7:
7.1 Classification of Credit Cards Advances 171
7.2 Classification of Auto Loans 173
7.3 Classification of Mortgage Loans 175
7.4 Classification of Personal Loans 177
List of Figures
Page No
Chapter: 1:
1.1 Source of Proceeds 7
1.2 Distribution of Precedes 7
1.3 Steps in Privatization (Pakistan) 8
1.4 Steps in Transaction 9
1.5 MCB 21
1.6 ABL 22
1.7 ABL 23
1.8 ABL 23
1.9 Pre -privatization Structure of Banking Sector 27
1.10 Global Privatization Proceeds 29
1.11 Privatization Proceeds by Region 29
1.12 Post Privatization Structure of Banking Sector 30
Chapter 3:
3.1 Bank’s Efficiency Model 57
3.2 Percentage of Provision for MCB to Total Advances 60
3.3 Percentage of Provision for ABL to Total Advances 60
3.4 Spread Rate Before Privatization 65
3.5 Spread Rate after Privatization 65
Chapter 4:
4.1 Inflow of Foreign Investment in Pakistan 99
4.2 Deposits of Schedule Banks 100
4.3 Scatter Diagram for Hypothesis No. 1 102
4.4 Scatter Diagram for Hypothesis No. 2 105
4.5 Budget Deficit 108
Chapter 5:
5.1 Number of Employees for MCB Before and After Privatization 123
5.2 Number of Branches for MCB Before and After Privatization 124
5.3 Operating Cost of MCB Before and After Privatization 125
5.4 Operating Cost of ABL 127
5.5 Number of Banks Before and After Privatization 128
Chapter 6:
6.1 Number of Credit Cards 137
6.2 Number of Online Accounts 137
6.3 Number of ATM 137
6.4 Customer knowledge about Privatization of Banks 139
6.5 Employees Behavior with Customers 141
6.6 Customers Awareness about Bank New Products 142
6.7 Customers Views about Operation of New Products 143
List of Appendix
Page No
1.1 Financial Sector of Pakistan 218

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

ADB Asian Development Bank
ATM Automated Teller Machine
BOOT Build-Own-Operate and Transfer
BOO Build-Own-Operate
CCOP Cabinet Committee on Privatization
DEA Data Envelopment Analysis
DFIs Depository Financial Institutions
EOI Expression of Interest
FA Financial Advisor
MCB Muslim Commercial Bank
NPAs Non Performing Assets
NPLs Non Performing Loans
PC Privatization Commission of Pakistan
RFP Request for Proposal
SBP State Bank of Pakistan
SOEs States Owned Enterprises
SOQ Statement of Qualification
UBL United Bank Limited
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
i
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 fundamental changes in the government’s role in
economy. 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 Pakistan’s 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 Employee’s 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.
v
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
term—but 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 India-
disinvestments) 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 public’s 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 public-

private partnerships, such as voucher systems. Even the creation of federal
corporations, quasi government organizations and government–sponsored
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.Coşkun 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).
5
Table.1.1 Number of Privatized Transactions in Pakistan
(Rs. In Million)
1991 Jul2002 Jul To Date
to to Jun 2003
June 2003 to
2002 May
2004
Sector No Amount No Amount No Amount No Amount
Banking 4 5644 2 12970 1 22409 7 41023
Capital Markets 3 1300 8 8421 3 9759 14 19482

Transaction
Energy 12 20898 12 20898
Telecom 2 30558 2 30558
Automobile 7 1102 7 1102
Cement 11 2 1048 13 8838
Chemical/fertilizer 16 9383 1 815 1 6 18 10204
Engineering 7 187 7 187
Gee Miles 21 768 81 22 849
Rice/Roti Plant 23 326 23 326
Textile 2 87 2 87
Newspapers 5 270 5 270
Tourism 3 594 1 1211 4 1805
Others 5 154 1 530 6 687
Total 121 79061 11 22211 10 35044 142 136316
Source: Privatization Commission of Pakistan
6
F igure 1.1:Sources of P roceeds
B anking & C apital
M arket T ransactions E nergy
33% 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
64
5
5
16
R eturn ed to SO E P rivatisatio n E xpense
R estru cturing E xpense R eturned to G O P
7
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
8
Figure 1.4
Steps in a Transaction with Transfer or Management or Sale of Asset or Business
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,
infrastructure, or utilities, the FA carries out this function. Following due diligence, the
10
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 enterprise’s
inputs or outputs and other sectoral or regulatory policies. For many monopolies or
quasi-monopolies, the “rules of the game” specifying the competition framework post-
privatization, 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 pre-
qualification 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 PC’s 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) Improve the overall efficiency of the economy
(2) Improve the efficiency, productivity and profitability of firms;
(3) Improve the quality of products and services; and
(4) Attract foreign investors.
Fiscal objectives:
(1) Reduce government subsidies to public enterprises;

(2) Raise money from the sale of public enterprises; and
(3) Increase tax revenue from private enterprises.
Social and political objectives:
(1) Improve the welfare of the society;

(2) Promote the ownership of private enterprises by nationals;
(3) Create a property-owning middle class;
(4) Increase total employment in the economy; and
(5) 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
nation’s 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 SBP’s 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 ABL’s 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 bank’s 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 Pakistan’s 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 People’s 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 1998 1999
Non-OECD Countries OECD Countries Total
Source: Mahboobi, 2000.
Figure 1.11 Privatization Proceeds by Region,1990-2000

4% (US$billion)
3%
3%
14% South Asia
21%
Middle East and
North Africa
Eastern Europe
and Central
Asia
Latin America
and the
Caribbean
55% East Asia and
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
mattered—that 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 problems—potential 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 rewards—and 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 OECD Non-OECD

countries Countries Countries
Number of countries 51 33 18
Number of Transactions 270 156 114
Average (median) size per 482.66 247 710

Transaction in US$ Millions
(44) (85) (376)
Average (median) percent of 59.1 46.3 49.6

Enterprise sold in transaction
(55.0) (40.0) (41.7)
Percent of transactions through 37.9 43.6 50.1

Public share offering
Total value of all transactions in 1161558 38473 80897

US$ millions
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 of Value (US$ Million)

transactions
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 country’s 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 customer’s 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 privatization⎯though 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 customer’s 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 bank’s 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
A Case Study of MCB and ABL
Overall Introduction of the Study
Impact on Eco.
Economic Impact Customer Impact Legal Impact Summary &
Development t Impact Conclusion
Efficiency
Introduction
Introduction Conclusion
Introduction Secondary Data is
Introduction
Introduction
Secondary / Published
Findings Recommendat
Data is used
Secondary / Published Data is Secondary / Published Primary Data is

Used Data is Used used
Conclusion
Hypothesis are developed
DPA/Theoretical Framework / Points for further

Ratio Analysis Hypothesis are Semi Structured Research
Statistical Methods are used
developed Interviews
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 Pakistan’s 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 post-
privatization 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 pre-
privatization 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 consumer’s 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 x-
efficiency 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 Pakistan’s 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 after-
tax 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) Data Envelopment Analysis
ii) Theoretical framework used by Sam Q. Ziorklui et al is to
evaluate the efficiency of both banks.
iii) 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 Mean Variance Standard Deviation Estimated Standard
(Rs.Millions) Error of mean
171 34.2 9.665 6.95 9.665
Table No.3.2
1997-2001
MCB after Privatization
Inputs Assets Mean Variance Standard Deviati Estimated Standa

0.978 0.1956 0.0060 0.0778 0.00121
Efficiency = 9.665/0.00121 > 1 => MCB’s relative efficiency better after privatization than
before
55
Table No.3.3
1987 - 1990
ABL Before Privatization
72.9 18.225 15.3425 3.92 3.84
Table No.3.4
1996-1999
ABL After Privatization

2.358 0.589 0.1182 0.34 0.03
Efficiency = 3.84/0.03 > 1 => ABL’s 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
3: Staff cost P/U of employee
2:liquidity fund/T.deposit 4: Staff cost P/U of Op.cost
3:Liquid funds/T.assets
Liquid 1:Pro.of loan losses

1:return on assets ity Transac 2:write of loans losses
2:return on equity Earning tion

Profitab
ility
t Asset
quality
1:income/assets Mang. Banks 1:Default risk
2:income/fixed assets Compt 2:Capital risk
Efficiency Risk 3:interest risk
Model 4:liquidity risk
exposur
Inter. Capitl
Proxe Adequa
cy
1:private loans/T.loans
es Sprea
2:public loans/T.loans d 1:Demand deposit/Total deposits
3:Govt.loans/T.loans 2:quasi money/T.deposits
Rate
4:total credits/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 Transaction Cost
Period Bank Average Average staff Average staff Average staff
operating cost % per cost % per cost per unit
cost as % unit of total employee of operating
of total income/ cost
income/ revenue
revenue
Before MCB 92.8 26.7 63381.6 28.71
privatization ABL 96.4 28.6 N.A N.A
1987-91
After MCB 92.78 24.68 371906 28.25
privatization ABL 99 24.47 N.A N.A
1997-2001
Source: See appendix 3.2
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 Non-
performing 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 data’s 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 1997
7.55 6.2
5.08 5.95
2000 1998
5.68
1999
Figure 3.3 Provision as % of T/Advances for ABL
1999 5.07 1997

8.62
6.72
1998
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 Before privatization After Privatization
%of Net 1987 1988 1989 1990 1991 1997 1998 1999 2000 2001
interest MCB 35.38 39.20 34.07 35.19 33.77 39.97 35.66 40.65 48.75 55.70
income to Year 1986 1987 1988 1989 1990 1997 1998 1999 2000 2001
Total ABL 37.32 38.20 37.50 32.10 33.33 07.71 12.69 04.59 N.A N.A
Revenue

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 depositor’s 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)

%of total 1987 1988 1989 1990 1991 1997 1998 1999 2000 2001
capital MCB 97.17 30.41 28.02 202.93 158.21 22.65 19.70 18.82 26.03 20.67
to total
Loan Year 1986 1987 1988 1989 1990 1997 1998 1999 2000 2001
ABL 8.28 12.11 14.55 13.51 14.72 17.75 21.64 18.38 N.A 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)
%of Share 1987 1988 1989 1990 1991 1997 1998 1999 2000 2001
holder MCB 2.88 9.35 9.08 7.79 9.45 10.29 12.08 12.49 7.77 11.81
contribution 1986 1987 1988 1989 1990 1997 1998 1999 2000 2001
to total ABL 29.52 23.86 26.80 25.05 20.09 0.24 0.20 0.20 N.A N.A
Assets
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 paid

Interest Rate Spread=
Interest earning assets total deposit
This approach shows a bank’s 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
1991 0 1987
3.3 3.37
2.07 3.06
1990 2.64 1988
1989
Figure 3.5 Spread Rate after Privatization
2001 0 1997
7.83 4.5
6.2 5.29
2000 6.76 1998
1999
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 Specialized Accounts
• Remit Expense Saving 38s

• Rupees Traveler Cheque Khushali Bachat
• Master Card Pak rupee
• Easy Personal Loan Foreign Currency A/Cs
• Car Cash
• Pyara ghare
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 Foreign Currency Accounts
Lockers Travelers Cheques
Seasonal Finance Term Deposits
MCB On Line Branches

Swat, Murree, Abbotabad, Haripur, Peshawar, Islamabad, Sialkot, Sargodha
Gujranwala, Sahiwal
MCB ATM Branches Lahore, Faisalabad, Bhawalpur, Multan, Quetta, Kamoki, Sadiq
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.
Table 3.9. Intermediation Proxies
Bank Intermediation proxies Before privatization After Privatization
MCB 1987 1988 1989 1990 1991 1997 1998 1999 2000 2001
% of demand deposits to total 19.60 22.14 22.69 22.95 25.40 36.66 23.25 17.10 21.37 22.02
deposits
% of long term deposits to total 28.96 20.00 22.00 20.70 22.15 28.34 26.68 27.21 21.14 18.39
deposits
% of private loans to total loans 69.35 74.63 82.42 80.24 81.34 12.01 4.4 NA NA NA
% of total loans to total deposits 58.03 59.80 61.39 68.57 59.95 51.74 50.81 51.73 63.50 49.55
1986 1987 1988 1989 1990 1997 1998 1999 2000 2001
ABL % of private loans to total loans NA 70.70 80.18 NA NA NA 91.17 95.00 NA NA
% of public loans to total loans NA 19.37 07.29 NA NA NA 08.83 05.00 NA NA
% of total loans to total deposits 55.83 49.07 37.68 48.61 56.06 NA NA ,57.12 55.81 59.35
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 Before Privatization After Privatization

1987 1988 1989 1990 1991 1997 1998 1999 2000 2001
MCB % of 0.566 0.636 0.631 0.364 0.381 0.822 0.632 0.763 0.757 1.123
income to
Assets
% of 127.4 147.8 171.3 91.09 112.1 34.98 26.60 34.79 36.67 57.41
income to
Fixed
Assets
ABL 1986 1987 1988 1989 1990 1997 1998 1999 2000 2001
% of 0.273 0.264 0.24 0.194 0.179 0.038 0.190 0.066 NA NA
income to
Assets
% of 52.96 54.93 52.14 49.72 46.83 3.296 6.815 2.322 NA NA
income to
Fixed
Assets
3.3.10. Earning and Profitability

.
Earnings quality for a bank generally refers to the composition, level and stability of
bank’s profits. A bank’s 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 Earning and Profitability
Bank Description Before Privatization After Privatization
Year 1987 1988 1989 1990 1991 1997 1998 1999 2000 2001
Return of Assets 0.566 0.636 0.631 0.364 0.381 0.823 0.632 0.763 0.757 1.123
%of income to
MCB Assets
Return of equity 1.565 5.670 5.728 2.839 3.601 8.471 7.640 9.537 5.879 13.27
% of income to
capital
year 1986 1987 1988 1989 1990 1997 1998 1999 2000 2001
Return of Assets 0.273 0.264 0.234 0.194 0.179 1.832 8.753 3.445 NA NA
% of income to
ABL Assets
Return of equity 8.076 6.295 6.269 4.862 3.738 0.477 1.834 0.700 NA NA
% of income to
capital
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
Researcher examined the following proxies:
• Cash as ratio of demand deposits
• Liquid funds/total deposits
• Liquid funds as ratio of total assets.
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 bank’s 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 bank’s assets, and principal obligations are the deposits
that can be withdrawn on the request—with 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

Earning Assets to Total Assets 81.06% 77.20% 81.48% 79.72% 86.52% 81.20%
Return on Earning Assets 0.33% 0.47% 0.55% 0.76% 0.99% 0.62%
Interest margin to Average Earning Assets 5.015 5.25% 5.20% 6.51% 5.28% 5.45%
Loan Loss Coverage Ratio (times Per Year) 2.42% 26.86% 3.06% 7.50% 4.21% 8.81%
Equity Capital To Total Assets 2.39% 2.44% 2.52% 2.62% 2.68% 2.53%
Deposit Time Capital (Time Per Year) 34.69% 33.74% 31.71% 30.68% 29.85% 32.13%
Loans to Deposits 51.98% 51.72% 63.50% 49.55% 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 1998 1999 2000 2001 2002

Earning Assets to Total Assets * 100% -3.86 4.28 1.76% 3.3%
Earning Assets to Total Assets ** 100% -3.11% -2.66% -1.28% 2.32%
Return on Earning Assets * 100% 43.06% 18.90% 37.01% 29.71%
Return on Earning Assets ** 100% 43.06% 70.09% 133.05% 202.28%
Interest Margin to Average earning
Assets * 100% 4.81% -1.00% 25.18% -18.87%
Interest Margin to Average earning
Assets ** 100% 4.81% 3.76% 29.88% 5.37%
Equity capital To Total Assets * 100% 2.36% 3.13% 3.89% 2.25%
Equity capital To Total Assets ** 100% 2.36% 5.57% 9.67% 12.14%
Loans to Deposits* 100% -0.51 22.79% -21.97% -12.83%
Loans to Deposits** 100% -0.51 22.16% -4.67% -16.90%
* 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 1996 1997 1998 1999 Average

Earnings Assets to Total Assets 51.59% 52.53% 78.61% 76.63% 77.04% 67.2 8%
Return on Earning Assets 0.32% 0.15% 0.03% 0.03% 0.01% 0.11%
Interest Margin to Average Earning Assets 5.74% 4.16% 0.74% 1.23% 0.44% 2.46%
Loans Loss Coverage Ratio - - - - - -
Equity Capital to Total Assets 1.21% 1.40% 1.77% 1.89% 1.57% 1.57%
Deposit Times Capital 50.12% 42.76% 41.08% 45.89% 55.07% 46.98%
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 1997 1998 1999

Earning to Total Assets * 100% -2.52% 23.03% 21.02% -0.86%
Earning to Total Assets ** 100% -2.52% 19.93% 45.14% 43.89%
Return on Total Assets* 100% -57.89% -82.63% 19.98% -55.26%
Return on Total Assets** 100% -57.89% -92.68% -91.22% -96.07%
Interest Margin to Average Earning Assets* 100% -27.52% -82.25% 65.98% -63.85%
Interest Margin to Average Earning Assets** 100% -27.52% -87.13% -78.65% -92.28%
Equity capital To Total Assets* 100% 15.85% 26.84% 6.35% -16.77%
Equity capital To Total Assets** 100% 15.85% 46.94% 56.27% 30.06%
Loans to Deposits* 100% 0.39% -1.57% -2.29% 6.35%
Loans to Deposits** 100% 0.39% -1.18% -3.45% 2.68%
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 2000 2001 2002 Average

Earning Assets to Total Assets 79.19% 75.51% 73.24% 70.58% 75.71% 74.84%
Return on Earning Assets 2.81% 0.46% 0.58% -6.57% 1.09% -0.33%
Interest margin to Average Earning
Assets 1.79% 2.49% 4.11% 4.45% 4.44% 3.45%
Loan Loss Coverage Ratio -3.31% 1.17% 5.17% -8.31% 4.14% -0.12%
Equity Capital To Total Assets -5.38% 3.87% 3.98% 2.36% 2.77% 1.52%
Deposit Time Capital -17.26% 21.48% 20.31% 34.63% 30.47% 17.93%
Source. Ratios are calculated from the annual reports of UBL
Table 3.18 Percentage Changes in Ratios (UBL)
1998 1999 2000 2001 2002
Earning Assets to Total Assets * 100% -4.65% -3.00% -3.64% 7.27%
Earning Assets to Total Assets ** 100% -4.65% -7.51% -10.88% -4.40%

-
Return on Earning Assets * 100% -83.81% 26.38% -1241.17% 116.53%
Return on Earning Assets ** 100% -83.81% -79.54% -333.53% -61.39%
Interest Margin to Average earning Assets * 100% 38.96% 65.31% 8.23% -0.18%
Interest Margin to Average earning Assets ** 100% 38.96% 129.72% 148.62% 148.18%
Equity capital To Total Assets * 100% -171.84% 2.95% -40.69%

17.16%
- -
Equity capital To Total Assets ** 100% -171.84% 173.96% -143.86% 151.39%
Loans to Deposits* 100% 16.99% 19.64% 0.92% 17.74%
Loans to Deposits** 100% 16.99% 39.97% 41.26% 16.20%
* 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 UBL ABL Industry

(Average) (Average) (Average) 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 5.45% 3.45% 2.46% 3.79%

earning assets
Loan Loss coverage Ratio 8.81 (.12) - 4.35
Equity Capital To Total 2.53% 1.52% 1.57% 1.87%

Assets
Deposit Time Capital 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 Deposits (% of Advances (% NPLs (% 0f

Assets of deposits of of advances of total loans)
NCBs) NCBs) NCBs)
1994 18.1 17.6 17.7 18.1
1997 21.5 20.8 21.9 11.6
2000 18.2 18.3 21.5 14.4
2003 28.3 26.5 26.7 11.3
Source: Financial Sector Assessment 2001-2002,State bank of Pakistan
Table 3.21 Financial Indicators of ABL

Assets (% Deposits (%Advances NPLs (% 0f total
of Assets of of deposits(% of loans)
NCBs) of NCBs) 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
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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.
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Part 1 Using DEA approach; Akhtar (2002) has conducted a preliminary study of X-
Efficiency 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 don’t 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, industry-
level 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 cross-
section 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, Demirgüç-
Kunt 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 society’s 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 Economic growth

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

Independent Variable Number of Deposit
ii) The more the lending, more will be the GNP
92
Dependent Variable GNP
Independent Variable Lending
VARIABLES
1. Investment
* Domestic Investment.
* Foreign Investment
2. Deposits
3. Loans and advances
* Lending
4. 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) Capital account
(ii) 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 long-
term 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
FDI
1000.00
Portfolio
500.00
Total
0.00
-500.00
5
9
-8
-8
-8
-9
-9
-9
-9
-9
84
86
88
90
92
94
96
98
19
19
19
19
19
19
19
19
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
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) Current Deposits
ii) Call Deposits
iii) Saving Deposits
iv) Fixed Deposits (different types by duration)
v) 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 X Y
No. Of Investment
Deposits
1982 18251389 32261.8
1983 19565836 45033.5
1984 20488157 38572.3
1985 21215465 49056.1
1986 21720814 60230.4
1987 22578568 87273.6
1988 23947814 85882.1
1989 25140528 85303.9
1990 26756571 81226.1
1991 30993837 120021.0
1992 27106754 192185.5
1993 27973622 208043.1
1994 29520563 267805.2
1995 31085736 268794.3
1996 31723719 322875.8
1997 32271603 375286.2
1998 29772355 420830.2
1999 29710720 350326.2
2000 28409347 338796.6
2001 28043818 303782.4
Total 526277216 3733585.7
Source: Banking statistics of Pakistan 2001 –2002 State Bank of Pakistan.
99
Figure 4.3 Scatter diagram for hypothesis no.1
500000
400000
Deposits
300000
Series1
200000
100000
0
0 10000000 20000000 30000000 40000000
Investment
4.5.1. Results of Hypothesis No: 1
β = 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
γ = 0.8285 γ2 = 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.:
ΗO=ρ = 0.5 VS ΗI = ρ > 0.5
Using the test statistics Z = Zf - µz

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
γ2 = explained variations in y / Total variation in y
As
γ= γ2
γ2= 0.6864
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 GNP
Table 4.2
Lending X GNP
Y
1982 66842.3 317502
1983 80706.7 367807
1984 88941.8 413944
1985 105136.4 463375
1986 123397.5 507678
1987 121419.4 551809
1988 130012.4 630120
1989 142953.8 711143
1990 165618.7 796751
1991 189474.1 932282
1201301
1992 250283.6
1404853
1993 303623.3
1686020
1994 341114.5
1922755
1995 417198.0
2207230
1996 462415.0
2456520
1997 532340.8
2710396
1998 575069.7
2877082
1999 629659.2
3116245
2000 745719.3
2001 746610.0 3409083
28683896
Total 6218536.5
Source: Banking statistics of Pakistan 2001 –2002 State Bank of Pakistan.
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Scatter diagram for hypothesis NO.2
Figure 4.4
comparison
4000000
Landing 3000000
2000000 Series1
1000000
0
0 2E+05 4E+05 6E+05 8E+05
GNP
4.9.1 Result from Hypothesis No: 2
β = 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
γ = 0.997 γ2 = 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 = Þ = 0.9 VS HI = Þ >0.9 at 5% level of significance. The calculation of Z stated in
(1) is then 7.3317 and Ho: Þ = 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.
γ = (γ2)
γ2 = 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 Increases in %
Deposits 19824 93107 78.7
Advances 11115 55263 80.00
Investments 72668 26774 73.00
No. Of A/Cs NA NA NA
Source: Annual reports for both banks for mentioned years.
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
104
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 Pakistan’s 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
105
to a huge amount of debt in billion is rather small, but that can have a significant
influence on the fiscal deficit.
Table 4.5 Fiscal Indicators as % of GDP
Years GDP real Overall Fiscal deficit
Growth
1990-91 5.4 8.8
1991-92 7.6 7.5
1992-93 2.1 8.1
1993-94 4.4 5.9
1994-95 5.1 5.6
1995-96 6.6 6.5
1996-97 1.7 6.4
1997-98 3.5 7.7
1998-99 4.2 6.1
1999-00 3.9 6.6
2000-01 2.2 5.2
2001-02 3.4 5.2
2002-03(BE) 5.1 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.
106
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. Goldsmith’s 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 system’s 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
107
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 (Demirgüç-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.
108
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
109
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 need–indeed, rarely– move in tandem. Third, the impact of privatization on
employment has depended primarily on the company’s 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,
110
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.
111
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
112
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 non-
wage benefits were equivalent to 20% of wages in Africa, 20-35 percent in Asia, and 24-
37 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 Privatization’s 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
113
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
114
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 Redundancy Retrenchment Costs

Bangladesh 240 thousand 25% Tk 7 billion
India 9.8 million 23%a Rs. 48092 billion
Nepal 46.7 thousand 60% Rs. 9914 million b
Pakistan 34.6 thousand 63% a Rs. 3559 million
Sri lanka 120 thousand 53% b 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
115
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
116
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,
117
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 country’s 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 relation’s 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:
118
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 month’s 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 month’s last drawn basic salary for each year of service will be paid in addition
under the arrangements of the Privatization Commission.
119
(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
120
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 12817 1997 13660
1987 12885 1998 12858
1988 12685 1999 12557
1989 12890 2000 12133
1990 12904 2001 11614
Figure 5.1 Number of employees for MCB pre & post

privatization periods
14000
13500
13000 Numbers of
12500 employees pre
privatization
12000
Numbers of
11500 employees post
11000 privatization
10500
1 2 3 4 5
121
Table 5.4 Numbers of Branches
Muslim Commercial Bank Limited
Before privatization After privatization
Years Numbers of Years Numbers of
branches branches
1986 1263 1997 1320
1987 1265 1998 1216
1988 1271 1999 1215
1989 1270 2000 1210
1990 1283 2001 1061
Figure 5.2 Number of Branches for MCB

before and after privatization
1400
1200
1000 Numbers of
800 branches
600 Numbers of
400 branches
200
0
1 2 3 4 5
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Table 5.5 Annual Operating Cost per Employee Before and After Privatization of
MCB
Years T. Operating cost Year T. Op. cost
Operating per employee Operating per
cost cost employee
1987 951934299 74271 1997 6488460000 474994
1988 1014285192 78718 1998 7325059000 569688
1989 1117094854 86664 1999 7104200000 565756
1990 1395556135 108266 2000 7195383000 593042
1991 1596859325 123749 2001 7371770000 634731
Source: Extracted from annual reports.
Figure 5.3 Operating Cost Before and After Privatization

MCB
T. Operating
8000000000 cost before
privatization
6000000000 Operating cost
per employee
4000000000 before
privatization
T. Operating
2000000000 cost after
privatization
0 Op. cost per
1 2 3 4 5 employee after
123
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
Years T. Operating Operating Year T. Operating Op. cost

cost cost per cost per
employee employee *
1986 971338511 141285 1997 3696699000 491255
1987 1126079280 160868 1998 3396440000 451354
1988 1254961428 176134 1999 3719758000 494320
1989 1524540158 206018
1990 1982658297 263476
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
T. Operating
Operating Cost of ABL Before and After Privatization
cost before
privatization
Operating cost
4000000000 per employee
3000000000 before
privatization
2000000000 T. Operating
cost after
1000000000 privatization
0 Op. cost per

1 2 3 4 5 employee
125
Table 5.9 Structure of Banking Sector for Pre and Post Privatization Period
Banks No. No. Of employees Average State owned 4

State owned 7 59706 8529 Private 20
Private -- -- -- Foreign 13
Foreign 17 NA NA
Specialized 3
Total 24 NA NA
Total 40
Source: Banking supervision department State Bank Of Pakistan (march, 2004)
Figure 5.5
Number of Banks before privatizationand after

State owned
privatization
Foreign
Foreign
Total
45
privatization
40
Banks after
Banks
35 before
30 privatizati
25
20 on No. 7 -
15 -
10
5
0
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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 personnel’s 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 employee’s benefits. We cannot
127
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 personnel’s 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 privatization’s
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, laid-
off 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.
129
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 re-
emerged 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 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
130
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. Customer’s 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 o’clock 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. Information’s 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
131
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 customer’s 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.
2. Service to Customers. The banks which can provide speedy, accurate and
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.
132
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.
133
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. Details of Consumers, Products and Services in Pakistan.

Products 2000 2001 2002 2003March
Numbers of Credit Cards 220000 295000 370000 400000
Number of On Line branches 322 450 777 994
Number of ATM 206 259 399 445
Number of ATM Transactions 3624 5924 9319 6450
(000)
Value of Transactions (in Million) 12507 22108 37786 28052
Trends in Auto Loans (in Million) 0.9 3.5 4.1 N.A
Source: Banking System review State bank of Pakistan, 2002.
134
Figure 6.1 Numbers of Credit Cards
400000
Numbers of
200000 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 Number of ATM
200
0
2000 2002
135
Table 6.2. Distribution of ATM (in Numbers)
2000 2001 2002 2003 March
Public Sector Commercial Banks 48 66 89 100
Domestic Private banks 113 146 245 278
Muslim Commercial Bank 75 103 151 155
(MCB)
Others 38 43 94 123
Foreign Banks 45 47 65 67
Total 206 259 399 445
Share of MCB in % 36.4 39.8 37.8 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
136
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
customer’s 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 Customers knowledge about Privatization of Banks
Questions Positive Extremely Negative Extremely

positive negative
1. Do you know what is 3% 2% 70% 25%
privatization?
2. Do you feel any change in bank 7% 5% 65% 28%
services?
3. Do you know about new 10% 5% 50% 35%
products of the banks?
4. Do you have confidence on 20% 15% 45% 20%
banks?
Figure 6.4 C u stom ers know ledge about P rivatization

1. D o you of
know w hat is
B an ks privatization?
80% 2. D o you feel any

chang e in bank
60%
services?
40%
3. D o you know about
20% new products of the
0% banks?
P ositive E xtrem ely N eg ative E xtrem ely 4. D o you have
positive neg ative confidence on banks?
137
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.
138
Table 6.4 Changes in Bank Employee’s Behavior
Questions Good Very Bad Very bad

good
Behavior with customers 30% 25% 23% 22%
Cooperation with customers 27% 14% 29% 30%
Dealing with customers 24% 10% 36% 30%
Provision of information 9% 6% 45% 40%
Figure 6.5 Employees Behavior with Customers
50%
40% Behavior with customers
30%
Cooperation with
customers
20%
Dealing with customers
10%
Provision of information
0%
Good Very good Bad Very bad
The survey reveals that employee’s 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 customer’s knowledge is
because of non-availability of appropriate information.
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Table 6.5 Customer’s Awareness About the Banks New Products
Positive Extremely Negative Extremely

Positive Negative
ATM 3% 2% 80% 15%
On line Account 5% 3% 65% 27%
Credit cards 7% 5% 60% 28%
EFTPOS 1% 0% 0% 99%
Figure 6.6 Customers Awareness About Bank New

Products
120%
100%
80% ATM
60%
40% On line Account
20% Credit cards
0%
EFTPOS
Positive Negative
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% don’t know what is EFTPOS?
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Table 6.6 Customers Views About Operation of New Products and Services
positive Negative
ATM 2% 5% 33% 60%
On line account 4% 5% 51% 40%
Credit cards 5% 6% 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 customer’s
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 Pakistan’s 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. As a result,
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 credit-
worthiness 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
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, bank’s 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:
1 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.
3 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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4 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 bank’s 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 SBP’s
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approval. SBP requires that the incumbent should also qualify the standard ‘fit and
proper test’ for appointment. A minimum of 5 years of senior business/management
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 SBP’s 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 company’s 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 auditor’s 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 bank’s 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 SBP’s 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 company’s 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, Moody’s 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 bank’s / DFI’s 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 bank’s / DFI’s
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 x 360 x 100
Outstanding Principal Amount No. of Days
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% 10 times of the equity
b) Below 5% 6 times of the equity
c) Below 10% 4 times of the equity
d) Upto and above 10% 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 bank’s / DFI’s liability shall be limited to those amounts wrongly charged
to the credit card holder’s 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 2. Department 3.Tretment of 4.Provision to be
Income made.
1. Loss Where Unrealized Provision of 100%
Markup/interest or Markup/Interest to of the principal
principal is over due be put in suspense amount less the
(past due) by 180 and not to be amount of liquid
days from the due credited to income securities with the
date. account except Bank/DFI.
when realized in
cash
*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 2. Department 3.Tretment of Income 4.Provision to be made.
1. Substandard. Where Markup/interest Unrealized No provision is
or principal is over due Markup/Interest to be required.
(past due) by 90 days put in suspense and not
from the due date. to be credited to income
account except when
realized in cash
2. Doubtful Where Markup/interest As above Provision of 50% of the
or principal is over due principal amount less
by 180 days from the the amount of liquid
due date. securities with the
Bank/DFI.
3. Loss Where Markup/interest As above Provision of 100% of
or principal is over due the principal amount
by one year or more less the amount of liquid
days from the due date. securities with the
Bank/DFI.
* These specific provisions will be in addition to general reserve maintained under Regulation R.4
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 bank’s / DFI’s 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 bank’s / DFI’s 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.OAEM (other Assets Where Markup/interest Unrealized No provision is required.
specially mentioned or principal is over due Markup/Interest to be put
(past due) by 90 days in suspense and not to be
from the due date. credited to income account
except when realized in
cash
2. Substandard Where Markup/interest As above Provision of 20% of the
or principal is over due difference resulting from
by 180 days from the outstanding balance principal
due date. less the amount of liquid
securities and forced sale
value of mortgage property as
valued by valuers on the
Panel of PBA.
by one year or more outstanding balance principal
days from the due date. less the amount of liquid
Panel of PBA.
4.Loss. Where Markup/interest As above Provision of 100% of the

by two year or more outstanding balance principal
from the due date less the amount of liquid
Panel of PBA.
* These specific provisions will be in addition to general reserve maintained under Regulation R.4
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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. Substandard Where Markup/interest As above No provision is required.

or principal is over due
by 180 days from the
due date.
or principal is over due principal less the amount of
by 180 days or more liquid securities with the
from the due date. Bank.
4.Loss. Where Markup/interest As above Provision of 100% of the

or principal is over due principal less the amount of
by one year or more liquid securities with the
from the due date 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 reform-
minded 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 government’s 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 Total

PMEs * 9 13 16 38
Misc. 3 10 1 14
Ghee Mills 2 12 5 19
Rice Mills 2 - 6 8
Banks 2 2 - 4
Total 18 37 28 83
Percentage 22 44 34 100%
Source: Impact and Analysis of Privatization in Pakistan: ADB
Report October 1998.
* Public Manufacturing Enterprises.
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 world’s
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 system’s ability to arrange
financing that is mutually beneficial to potential supplier and user of capital.
Operational efficiency. Which depends on the cost-effectiveness and
reliability of the system.
Dynamic efficiency. Which depends on the innovativeness of the system and
on the resulting benefits to the system users.
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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
country’s 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 customer’s services. With a phenomenal growth of
electronic transactions internationally, it was 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
184
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 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.
185
(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),
customer’s 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 cross-
country 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
186
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 government’s 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
187
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
188
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 donor’s 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.
189
One another serious problem researcher has faced during collection of data were non-
cooperation 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 non-
financial 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).
190
• 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.
191
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.
192
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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 Development Finance Institutions

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

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

1 Asian Leasing Corporation Ltd. 1 Askari Leasing Company Ltd.
2 Askari Leasing Company Ltd. 2 Capital Assets Leasing Corporation Ltd.
3 Atlas Lease Ltd. 3 Crescent Leasing Company Ltd.
4 Capital Assets Leasing Corporation Ltd. 4 Dawood Leasing Company Ltd.
5 Crescent Leasing Company Ltd. 5 First Leasing Corporation
6 Dadabhoy Leasing Company Ltd. 6 Grays Leasing Ltd.
7 Dawood Leasing Company Ltd. 7 Ibrahim Leasing Ltd.
8 English Leasing Ltd. 8 Inter Asia Leasing Company Ltd.
9 First Leasing Corporation 9 International Multi Leasing Corporation Ltd.
10 Ghandhara Leasing Company Ltd. 10 Lease Pak Ltd.
11 Grays Leasing Ltd. 11 National Development Leasing Corporation Ltd.
12 Ibrahim Leasing Ltd. 12 Natover Lease & Refinance Ltd.
13 Inter Asia Leasing Company Ltd. 13 Network Leasing Corporation Ltd.
14 International Multi Leasing Corporation Ltd. 14 Orix Leasing Pakistan Ltd.
15 Lease Pak Ltd. 15 Pacific Leasing Corporation Ltd.
16 Mercantile Leasing Company Ltd. 16 Pak-Apex Leasing Company Ltd.
17 National Assets Leasing Corporation Ltd. 17 Pak-Gulf Leasing Ltd.
216
18 National Development Leasing Corporation Ltd. 18 Pakistan Industrial & Commercial Leasing Ltd.
Appendix 1.1 Continued..

19 Natover Lease & Refinance Ltd. 19 Paramount Leasing Ltd.
20 Network Leasing Corporation Ltd. 20 Saudi Pak Leasing Company Ltd
21 Orix Leasing Pakistan Ltd. 21 Security Leasing Company Ltd.
22 Pacific Leasing Corporation Ltd. 22 Sigma Leasing Corporation Ltd.
23 Pak-Apex Leasing Company Ltd. 23 Trust Leasing Corporation Ltd.
24 Pak-Gulf Leasing Ltd. 24 Union Leasing Ltd.
25 Pakistan Industrial & Commercial Leasing Ltd. 25 Universal Leasing Corporation 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.
Modarabas Modarabas
1 Al-Noor Modaraba 1 Al-Noor Modaraba
2 Allied bank Modaraba 1st 2 Allied bank Modaraba 1st
3 Al-Zamin Modaraba 3 Al-Zamin Modaraba
4 B.F. Modaraba 4 B.F. Modaraba
5 B.R.R. International Modaraba 5 B.R.R. International Modaraba
6 Confidence Modaraba 1st 6 Constellation Modaraba 1st
7 Constellation Modaraba 1st 7 Crescent Modaraba 1st
8 Crescent Modaraba 1st 8 Custodian Modaraba 1st
9 Custodian Modaraba 1st 9 Elite Capital Modaraba 1st
10 Dadabhoy Modaraba 1st 10 Equity Modaraba 1srt
11 Elite Capital Modaraba 1st 11 Fayzan Manufacturing Modaraba
12 Equity Modaraba 1srt 12 Fidelity Leasing Modaraba 1st
13 Fidelity Leasing Modaraba 1st 13 Financial Link Modaraba
14 Financial Link Modaraba 14 General leasing Modaraba 1st
15 General leasing Modaraba 1st 15 Grindlays Modaraba 1st
16 Grindlays Modaraba 1st 16 Guardian Leasing Modaraba
17 Guardian Leasing Modaraba 17 Habib Bank Modaraba 1st
18 Habib Bank Modaraba 1st 18 Habib Modaraba 1st
19 Habib Modaraba 1st 19 Hajveri Modaraba 1st
20 Hajveri Modaraba 1st 20 IBL Modaraba 1st
21 IBL Modaraba 1st 21 Imrooz Modaraba 1st
22 Ibrahim Modaraba 1st 22 Industrial Capital Modaraba 1st
23 Imrooz Modaraba 1st 23 Interfund Modaraba 1st
24 Industrial Capital Modaraba 1st 24 Islamic Modaraba 1st
25 Interfund Modaraba 1st 25 LTV Capital Modaraba
26 Islamic Modaraba 1st 26 Mehran Modaraba 1st
27 LTV Capital Modaraba 27 Modaraba Al Tijarah
28 Mehran Modaraba 1st 28 Modaraba Al-Mali
29 Modaraba Al Tijarah 29 National Modaraba 1st
30 Modaraba Al-Mali 30 Pak Modaraba 1st
31 National Modaraba 1st 31 Paramount Modaraba 1st
32 Pak Modaraba 1st 32 Professional Modaraba 1st
33 Paramount Modaraba 1st 33 Prudential Modaraba 1st
34 Professional Modaraba 1st 34 Punjab Modaraba 1st
35 Providence Modaraba 1st 35 Tri-Star Modaraba 1st
36 Prudential Modaraba 1st 36 Tri-Star Modaraba 2nd
37 Prudential Modaraba 2nd 37 Trust Modaraba
38 Prudential Modaraba 3rd 38 UDL Modaraba 1st
39 Punjab Modaraba 1st 39 Unicap Modaraba
40 Schon Modaraba 40 Unity Modaraba
41 Tri-Star Modaraba 1st
42 Tri-Star Modaraba 2nd
43 Trust Modaraba
44 UDL Modaraba 1st
45 Unicap Modaraba
46 Unity Modaraba
Housing Finance Companies Housing Finance Companies
1 Citibank Housing Finance Co. Ltd. 1 Citibank Housing Finance Co. Ltd.
2 House Building Finance Corporation 2 House Building Finance Corporation
217
3 International Housing Finance Ltd. 3 International Housing Finance Ltd.
4 LTV Housing Finance Ltd. 4 LTV Housing Finance Ltd.
1.1 continued
Mutual Funds Mutual Funds
1 1st ICP Mutual Fund 1 1st ICP Mutual Fund
2 2nd ICP Mutual Fund 2 2nd ICP Mutual Fund
3 3rd ICP Mutual Fund 3 3rd ICP Mutual Fund
4 4th ICP Mutual Fund 4 4th ICP Mutual Fund
21 21st ICP Mutual Fund 21 21st ICP Mutual Fund
22 22nd ICP Mutual Fund 22 22nd ICP Mutual Fund
23 23rd ICP Mutual Fund 23 23rd ICP Mutual Fund
26 ICP SEMF 26 ICP SEMF
27 Investment Corporation Of Pakistan (Mutual Funds only) 27 Investment Corporation Of Pakistan (Mutual Funds Only)
28 National Investment Trust Ltd. 28 National Investment Trust Ltd.
29 Golden Arrow Selected Stock Fund 29 Golden Arrow Selected Stock Fund
30 Tri-Star Mutual Fund 30 Tri-Star Mutual Fund
31 Growth Mutual Fund 31 Growth Mutual Fund
32 Security Stock Fund 32 Asian Stock Fund
33 Asian Stock Fund 33 Prudential Stock Fund
34 Prudential Stock Fund 34 KASB Premier Fund
35 KASB Premier Fund 35 Safeway Mutual Fund
36 Safeway Mutual Fund 36 First Capital Mutual Fund
37 First Capital Mutual Fund 37 Dominion Stock Fund
38 Confidence Mutual Fund 38 Al-Meezan Mutual Fund
39 Dominion Stock Fund
40 Al-Meezan Mutual Fund
Discount Houses Discount Houses
1 First Credit & Discount Corporation (Pvt) Ltd. 1 First Credit & Discount Corporation (Pvt) Ltd.
2 National Discounting Services Ltd. 2 National Discounting Services Ltd.
3 Prudential Discount & Guarantee House Ltd. 3 Prudential Discount & Guarantee House Ltd.
4 Speedway Fondmetal (Pakistan) Limited 4 Speedway Fondmetal (Pakistan) Limited
Venture Capital Companies Venture Capital Companies
1 Pakistan Emerging Ventures Ltd. 1 Pakistan Emerging Ventures Ltd.
2 Pakistan Venture Capital Ltd. 2 Pakistan Venture Capital Ltd.
3 TMT Venture Limited
4 TRG Pakistan Limited
218
Appendix 1.2 Privatization Proceeds From I
Transactions
From 1991 to June 30, 2003
Rs (in million)
Sr. No Unit Name Sale Date of Buyer Name
Proceeds Transfer
Banking and Finance

Bank
1 Allied Bank Limited (51%) 971.6 Feb-91 EMG
2 Muslim Commercial Bank (75%) 2,420.0 Apr-91 National Group
3 Bankers Equity (26%) 618.7 Jun-96 LTV Group
4 Habib Credit & Exchange (70 %) 1,633.9 Jul-97 Sh. Nahyan bin Mubarik Al-
Nahyan
5 United Bank Ltd. (51%) 12,350.0 Oct-02 Consortium of Bestway &
Abu Dhabi Group
6 Bank Alfalah 620.0 Dec-02 Abu Dhabi Group
18,614.2
Capital Market Transaction
7 Muslim Commercial Bank (6.8%) 563.2 Jan-01 MCB Employees-PF &
Pension Fund
8 Muslim Commercial Bank (4.4%) 364.0 Nov-01 MCB Employees-PF &
Pension Fund
9 NBP (37.3 million shares) 373.0 Feb-02 Listing/Public Offer
10 Muslim Commercial Bank (CDC) 664.0 Oct-02 Stock Exchange
11 Pakistan Oil Fields Limited shares (CDC) 5,055.0 Oct-02 Stock Exchange
12 ICP Lot – A 175.0 Sep-02 ABAMCO
13 ICP Lot – B 303.0 Oct-02 PICIC
14 ICP – SEMF 787.0 Apr-03 PICIC
15 National Bank of Pakistan 10% shares 782.0 Nov-02 Stock Exchange
thru stock exchange
16 Attock Refinery Limited shares (CDC) 614.0 Jan-03 Stock Exchange
17 DG Khan Cement shares (CDC) 41.0 Dec-02 Stock Exchange
Total 9,721.2
Total Banking & Finance: 28,335.4
Energy Sector
18 Mari Gas (20%) 102.4 Apr-94 Mari Gas Company Ltd.
19 Kot Addu Power Company (26%) 6,707.6 Jun-96 National Power
20 Kot Addu Power Company (10%) 2,370.7 Nov-96 National Power
21 Kot Addu (Escrow A/c) 1,033.0 Apr-02 National Power
22 SSGC LPG business 369.0 Aug-00 Caltex Oil Pak.(Pvt) Ltd.
23 SNGPL LPG business 142.0 Oct-01 Shell Gas LPG Pakistan
24 Badin II (Revised) 516.1 25-06-02 BP Pakistan & Occidental
Pakistan
25 Adhi 681.4 04-05-02 Pakistan Oil Field
26 Dhurnal 230.7 04-05-02 Western Acquisition
27 Ratana 32.0 04-05-02 Western Acquisition
28 Badin I 8,599.1 25-06-02 BP Pakistan & Occidental
Pakistan
29 Turkwal 120.3 25-06-02 Attock Oil Company
Total 20,904.3
1.2
Continued
219
Telecommunications
30 PTCL (2%) 3,032.5 Aug-94 Through Local Stock
Exchange
31 PTCL (10%) 27,525.9 Sep-94 Through DR form
Total 30,558.4
Industrial Units
Automobile
32 Al-Ghazi Tractors Ltd. 105.6 Nov-91 Al-Futain Industries (Pvt) Ltd.
UAE
33 National Motors Ltd. 150.4 Jan-92 Biboo Jee Services
34 Millat Tractors Ltd. 306.0 Jan-92 EMG
35 Baluchistan Wheels Ltd. 276.4 May-92 Abdul Qadir & Saleem I.
Kapoorwala
36 Pak Suzuki Co. Ltd. 172.0 Sep-92 Suzuki Motors Co. Japan
37 Naya Daur Motors Ltd. 22.3 Jan-93 Farid Tawakkal & Saleem I.
Kapoorwala
38 Bolan Castings 69.2 Jun-93 EMG
Total 1,101.9
Cement
39 Maple Leaf Cement 485.7 Jan-92 Nishat Mills Ltd.
40 Pak Cement 188.9 Jan-92 Mian Jehingir Ellahi & Ass
41 White Cement 137.5 Jan-92 Mian Jehingir Ellahi &

Associates
42 D.G Khan Cement 1,972.8 May-92 Tariq Sehgal & Associates
43 Dandot Cement 636.7 May-92 EMG
44 Garibwal Cement 836.3 Sep-92 Haji Saifullah & Group
45 Zeal Pak Cement 239.9 Oct-92 Sardar M. Ashraf D. Baluch
46 Kohat Cement 527.9 Oct-92 Palace Enterprises

47 Dandot Works - National Cement 110.0 Jan-95 EMG
48 General Refractories Limited 18.9 Feb-96 Shah Rukh Engineering
49 Wah Cement 2,635.5 Feb-96 EMG
Total 7,790.1
Chemical
50 National Fibres Ltd 756.6 Feb-92 Schon Group
51 Kurram Chemicals 33.8 Feb-92 Upjohn Company USA
52 Pak PVC Ltd 63.6 Jun-92 Riaz Shaffi Reysheem
53 Sind Alkalis Ltd 152.3 Oct-92 EMG
54 Antibiotics (Pvt) Ltd 24.0 Oct-92 Tesco (Pvt) Ltd.
55 Swat Elutriation 16.7 Dec-94 Sahib Sultan Enterprises
56 Nowshera PVC Co. Limited 20.7 Feb-95 Al_syed Enterprises
57 Swat Ceramics (Pvt) Limited 38.6 May-95 Empeiral Group
58 Ittehad Chemicals 399.5 Jul-95 Chemi Group
59 Pak Hye Oils 53.6 Jul-95 Tariq Siddique Associates
60 Ravi Engineering Limited 6.5 Jan-96 Petrosin Products Pte
61 Nowshera Chemicals 21.2 Apr-96 Mehboob Ali Manjee
62 National Petrocarbon 20.8 Jul-96 Happy Trading
63 National Petrocarbon (add’l 10% shares) 2.3 Mar-02 Happy Trading
1,610.2
220
1.2 Engineering
continued
64 Karachi Pipe Mills 18.9 Jan-92 Jamal Pipe Industries
65 Pioneer Steel 4.4 Feb-92 M. Usman
66 Metropolitan Steel Mills Limited 66.7 May-92 Sardar M. Ashraf D. Baluch
67 Pakistan Switchgear 8.9 Jun-92 EMG

68 Quality Steel 13.2 Apr-93 Marketing Enterprises
69 Textile Machinery Co 27.9 Oct-95 Mehran Industries
70 Indus Steel Pipe 47.4 Oct-96 Hussien Industries
187.4
Fertilizer
71 Pak China Fertilizers Company Limited 435.4 May-92 Schon Group
72 Pak Saudi Fertilizers Ltd. 7,335.9 May & Sep-02 Fauji Fertilizers
73 Pak Saudi Fertilizers Ltd. (10%) 815.0 Sep-02 Fauji Fertilizers Ltd.
Total 8,586.3
Ghee
74 Fazal Vegetable Ghee 21.2 Sep-91 Mian Mohammad Shah
75 Associated Industries 152.0 Feb-92 Mehmoob Abu-er-Rub
76 Sh Fazal Rehman 64.3 Apr-92 Rose Ghee Mills
77 Kakakhel Industries 55.3 May-92 Mehmoob Abu-er-Rub
78 United Industries 15.5 May-92 A. Akbar Muggo
79 Haripur Vegetable Oil 30.1 Jul-92 Malik Naseer & Assoc.
80 Bara Ghee Mills 27.8 Jul-92 Dawood Khan
81 Hydari Industries - Aug-92 EMG
82 Chiltan Ghee Mills 47.5 Sep-92 Baluchistan Trading Co.
83 Wazir Ali Industries 31.9 Dec-92 Treat Corporation
84 Asaf Industries (Pvt) Limited 23.8 Jan-93 Muzafar Ali Isani
85 Khyber Vegetable 8.0 Jan-93 Haji A. Majid & Co.
86 Suraj Vegetable Ghee Industries 10.2 Jan-93 Trade Lines
87 Crescent Factories Vegetable Ghee Mills 46.0 Jan-93 S. J. Industries
88 Bengal Vegetable 19.1 Mar-93 EMG
89 A & B Oil Industries Limited 28.5 Mar-93 Al-Hashmi Brothers
90 Dargai Vegetable Ghee Industries 26.2 Nov-97 Gul Cooking Oil Industries
91 Punjab Veg. Ghee 18.7 May-99 Canal Associates
92 Burma Oil 20.1 Dec-96 Home Products Intl
93 E&M Oil Mills 94.0 Jul-02 Star Cotton Corp. Ltd.
94 Maqbool Oil Company Ltd. 27.6 Jul-02 Madina Enterprises
767.8
Mineral
95 Makerwal Collieries 6.1 Jul-95 Ghani Group of Industries
Rice
96 Sheikhupura 28.0 May-92 Contrast Pvt Ld.
97 Faizabad 21.2 May-92 Packages Ltd.
98 Siranwali 16.2 Jul-92 Enkay Enterprises
1.2
Continued
99 Hafizabad 20.0 Sep-92 Pak Pearl Rice Mills
100 Eminabad 24.1 Nov-92 Pak Arab Food Industries
221
101 Dhaunkel 79.2 Jun-93 Dhonda Pakistan Pvt Ltd.
102 Mabarikpur 14.3 Nov-93 Maktex Pvt) Ltd.
103 Shikarpur 32.5 Mar-96 Afzaal Ahmad
235.5
Roti Plants
104 Gulberg, Lahore 8.7 Jan-92 Packages Ltd.
105 Peshawar 2.6 Jan-92 Saleem Group of Ind
106 Head Office, Lahore 10.2 Jan-92 Hajra Textile Mills
107 Hyderabad 2.6 Jan-92 Utility Stores Corp.
108 Faisalabad 11.5 Jan-92 Azad Ahmad
109 Bahawalpur 1.6 Feb-92 Utility Stores Corp.
110 Multan 2.5 Feb-92 Utility Stores Corp.
111 Quetta 4.8 Feb-92 Utility Stores Corp.
112 Islamabad 3.6 Mar-92 Utility Stores Corp.
113 Taimuria, Karachi 9.2 Jun-92 Spot Light Printers
114 SITE, Karachi 5.1 Sep-92 Specialty Printers
115 Multan Road, Lahore 3.5 Dec-92 Utility Stores Corp.
116 Korangi, Karachi 4.1 Apr-93 Utility Stores Corp.
117 Mughalpura, Lahore - Jun-96 Pakistan Railways
118 Gulshan-e-Iqbal, Karachi 20.2 Mar-98 Ambreen Industries
90.2
Textile
119 Quaidabad Woollen Mills 85.5 Jan-93 Jehingir Awan Associates
120 Cotton Ginning Factory 1.2 Jun-95 Hamid Mirza
86.7
Total (all Industrial Units) 20,462.2
Miscellaneous
121 National Tubewell Const Corpn 18.6 Sep-99 Through Auction
122 Duty Free Shops 12.5 Sep-99 Weitnaur Holding Ltd.
123 Republic Motors (Plot) 6.3 Nov-99 Muhammad Mushtaq
124 Al Haroon Building Karachi 110.0 Sep-02 LG Group
147.4
Newspapers
125 N.P.T Building 185.0 Oct-93 Army Welfare Trust
126 Mashriq – Peshawar 26.6 Jun-95 Syed Tajmir Shah
127 Mashriq – Quetta 6.2 Jan-96 EMG
128 Progressive Papers Ltd. 46.1 May-96 Mian Saifu-ur-Rahman
129 Mashriq – Karachi 6.5 Aug-96 EMG
270.4
Tourism
130 Cecil's Hotel 190.9 Jun-98 Imperial Builders
131 Federal Lodges - 1- 4 39.2 Jan-99 Hussain Global Assoc.
132 Dean's Hotel 364.0 Dec-99 Shahid Gul & Partners
Total 594.1
Total 1,011.9
Total upto 30-6-2003 101,272.0
222
Appendix 1.3
List of Upcoming Transactions
Company Type of Sale Envisaged
Telecommunications
Pakistan Telecom Co Ltd (PTCL) 26% strategic sale
Oil and Gas
Pakistan State Oil (PSO) 51% strategic sale

Sui Southern Gas Corp Ltd (SSGCL) 5% Public Offer
Pakistan Petroleum Ltd (PPL) 51% strategic sale
National Refinery Ltd (NRL) 51% strategic sale
Banking and Finance
Habib Bank Limited (HBL) 51% strategic sale

National Investment Trust (NIT) Under review
Power
Karachi Electric Supply Corp (KESC) 51-74% shares

Faisalabad Electric Supply Co (FESCO) 56% shares
Genco 1 (Jamshoro) 51% strategic sale
Industry and Real Estate
Pakarab Fertilizer Ltd. 90% sale

Pakamerican Fertilizer Ltd. 90% sale
Faletti’s Hotel Asset sale
Malam Jabba Asset sale
National Construction Ltd. (NCL) Sale of shares
Koh-e-Noor Oil Mills Asset sale
223
Appendix 3.1
1987 - 1991
MCB Before Privatization
Inputs: Total Assets: X 28.6+28.4+32.5+36.3+45.2 = 171 X = 171/5 = 34.2 Mean

2
X 817.96+806.56+1056.25+1317.69+2043.04 = 6041.5
2 2
S = (6041.5 – 5×34.2 ) /4 = 48.325 V(X) = 48.325/5 = 9.665 Variances
S = 6.95 SD
1997 - 2001
MCB After Privatization
Inputs: Total Assets: X 0.150+ 0.150+ 0.159+ 0.332+ 0.187 = 0.978 X = 0.1956 Mean
2 2 2 2 2 2
X 0.150 + 0.150 + 0.159 + 0.332 + 0.187 = 0.215474
2 2
S = (0.215474 – 5×0.1956 ) /4 = 0.0060443; V(X) = 0.0060443/5 Variances
= 0.00120886
S = 0.077745096 SD
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 14.3+16.2+19.1+23.3 = 72.9 X = 72.9/4 = 18.225 Mean
2 2 2 2 2
X = 14.3 +16.2 +19.1 +23.3 = 1374.63
2 2
S = (1374.63 – 4×18.225 ) /3 = 15.3425 V(X) = 15.3425/4
= 3.84 Variances
S = 3.92 SD
1996 - 1999
ABL After Privatization
Inputs: Total Assets: X 0.634+0.724+0.894+0.104 = 2.356 X = 2.356/4 = 0.589 Mean
2 2 2 2 2
X 0.634 +0.724 +0.894 +0.104 = 1.736184
2 2
S = (1.736184 – 4×0.589 ) /3 = 0.1162 V(X) = 0.1162/4 = 0.03 Variances
S = 0.34 SD
Efficiency = 3.84/0.03= 128 = before/after > 1 => ABL relative performance after privatization better than before
or efficiency
224
Appendix 3.2 profit and Loss Account of MCB before Privatization (In rupees)
1987 1988 1989 1990 1991

Mark up/return/interest earned 2247813441 2176215890 2269720109 2638307048 3192089572
Mark up/return/interest expense 1452592066 1323036347 1496323415 1709808151 2114270463
Net mark up/interest 795221375 853179543 773396694 928498897 1077819109
Fee commission exchange and
brokerage income 325688688 355654427 564964067 581449453 659943826
Income from rent 1950212 2812918 4222321 4497900 5087622
Income from sale of investment 11632271 12177438 5238291 5154139 25948582
Dividend income
Other income 16800288 17473251 18895479 34816688 40785029
Total Income 1151292834 1241297577 1366716852 1554417077 1809584168
Expenses
Salaries,allowances,and provident
fund 637460521 666670339 744930735 987299939 1048004206
Rent ,taxes,insurance,lighting etc. 74645231 88796728 95169453 95133899 137050212
Law charges 5869566 9270198 10401559 7387179 11738725
Postages, telegrams and stamps. 23881320 24940754 30237294 35416944 39964353
Auditors' fee 150000 180000 180000 180000 180000
Depreciation on and repairs to the
banking company's property 27463718 25535284 25797395 28794140 32755206
Stationary printing, advertisment
etc. 19664853 18305468 22135940 22007213 42405567
Other expenditures 152246790 168252921 175079578 210947421 266627640
Donations 52300 433500 22900 28400 6936416
Contribution to staff welfare fund 10500000 11900000 13140000 8361000 11197000
Total expenses 951934299 1014285192 1117094854 1395556135 1596859325
Profit for the year before
taxation. 199358535 227012385 249621998 158860942 212724843
provision for taxation
Current 99200000 106000000 109120593 100000000 146000000
prior year -51662952 -8790426 -27120593 -20378294 nil
balance 151821487 129802811 167621998 38482648 66724843
Balance brought farward 93020 273007 434318 94066 614464
151914507 130075818 168056316 38576714 67339307
Transfer to reserve 143000000 121000000 155000000 25000000 67000000
proposed dividend 8641500 8641500 12962250 12962250 nil
Profit for the year 237007 434318 94066 614464 339307
225
3.2 continued Muslim Commercial bank Limited
Profit and Loss Account for after Privatization
1997 1998 1999 2000 2001
Mark up revenue 16,939,966 17,755,988 15,755,990 14,124,265 17,034,263
Mark up expense 10,267,190 11,099,850 9,420,968 7,238,680 7,544,897
Net Mark up 6,672,776 6,076,138 6,335,022 6,885,585 9,489,366
provision for diminution of investment 589,476 28,500 257,144 46,048 62,064
provision for non performing loans 806,252 144,000 601,799 1,704,944

Bad debts directly written off 153,804 120,130 39,424 483,943 448,999
Total Provision and write off 1,549,532 292,630 296,568 1,131,790 2,216,007
net Mark up after provision 5,122,088 5,808,124 6,038,454 5,753,772 7,272,321
fee commission and brokerage income 944,944 922,044 901,444 909,045 868,637
Dividend Income 31,259 24,290 40,245 158,909 243,994
Income from dealing in foreign currency 888,769 871,341 633,137 609,838 687,854
Other Income 736,188 646,263 701,459 1,085,614 400,140
Total Income 7,723,248 8,517,178 8,314,739 8,272,062 7,723,248
Administration Expenses 5933700 6004561 7038834 7130724 7331623
Other provisions 243744 9750 60570 30000 40000
Other Charges 311016 1310748 4796 36725 147
Profit Before Taxation 1234788 947003 1210539 1321795 2101176
taxation current 957720 650992 852186 1083048 655164
taxation prior years 44457 -1209758 -213126

taxation deffered 296385 674533 -210597 149200 35280
Net profit 238782 399180 568950 734729 1108176
226
Appendix 3.2 (cont) Profit and Loss Account of ABL before privatization
1986 1987 1988 1989 1990

Total Interest Revenue 899898667 1020801001 1097194673 1.297E+09 1655157873
Interest Expense 564044272 630851921 685760943 880659595 1103412084
Net Interest Revenue 335854395 389949080 411433730 416386869 551745789
Other Income 20302837 25019267 39463680 29232428 72855506
Commission & Fees 87502786 123822301 163577339 249592030 315015340
Trading Securities 1127749 2526375 4728213 1706707 732799
Gain (Loss) on Foreign Exchange
Other Income 10315 68780 69790 69240 71678
Total Income 444798082 541385803 619272752 696987274 940421112
Administrative Expense 282662261 340302646 387823052 435498471 594191960
Other Charges 97131978 118024713 148277433 174482092 244054253
Provision against non-performing
Loans
Total Expense 379794239 458327359 536100485 609980563 838246213
Income before tax 65003843 83058444 83172267 87006711 102174899
Taxation 27500000 36900000 33100000 33900000 41000000
Net Income 37503843 46158444 50072267 53106711 61174899
227
Appendix 3.2 Continued P/L Accounts for ABL After privatization (Rs.000)
1996 1997 1998 1999

Total Interest Revenue 4,692,220 5,026,784 6,059,060 7,287,432
Interest Expense 3,802,172 4,639,053 5,289,971 6,953,006
Net Interest Revenue 890,048 387,731 769,089 334,426
Other Income 405,746 361,322 426,229 358,997
Commission & Fees 1,185,396 1,130,242 1,033,310 1,172,024
Trading Securities 491,449 564,453 755,170 971,956
Gain (Loss) on Foreign Exchange - - - -
Other Income 795,933 1,313,718 710,238 1,081,457
Total Income 3,768,572 3,757,466 3,694,036 3,918,860
Administrative Expense 3,019,703 2,960,699 3,396,440 3,772,889
Other Charges - 32,001 128,004 128,004
Provision (write backs) against non-performing 515,000 736,000 - (53,131)
Loans
Total Expense 3,534,703 3,728,700 3,524,444 3,847,762
Income before tax 233,869 28,766 169,592 71,098
Taxation 164,000 15,102 150,000 60,554
Net Income 69,869 13,664 19,592 10,544
228
Appendix 3.2 Continued Balance Sheets MCB Before Privatization (Rs.000)
1987 1988 1989 1990 1991
cash at hand, state bankand national bank 2465981998 2417589203 2596318960 3191937581 5657745448
Balance with other banks 445612685 393587553 239004890 839288900 800016063
Money at call and short Notice 1265014411 1375497489 1210555383 273789665 1716640000
Total current Assets 4176609094 4186674245 4045879233 4305016146 8174401511
Investments ( at cost less provisions) 9837276759 9551587434 10991438501 10687540848 13047284777

Advances 13110617022 13096086856 15548316766 18987094540 21000380355
Total Intermediate assets 22947893781 22647674290 26539755267 29674635388 34047665132
Other Assets
PremisesLess depreciation 55312919 59417220 57450541 80890561 91853293
Furniture and Fixture less depreciation 101160251 94206545 88275453 93511494 97991533
Other Assets including Silver 1358472917 1384889117 1767546896 2139815304 2789395113
1514946087 1538512882 1913272890 2314217359
Total Assets 28639448962 28372861417 32498907390 36293868893 45201306582
Liabilities and Equities
Bills Payable 533829981 563123045 687304838 744181555 1026787023
Borrowings from other banks,Agents &cos. 2493654554 2616457444 2836566755 4049496898 4294052888
Other Liabilities 1775054031 1927313471 2128948269 2262969083 3237875029
Deposits and Other Accounts 22591537389 21899433139 25324893462 27690506893 35029152335
Total liabilities
Shareholders Equity 27394075955 27006327099 30977713324 34747154429 43587867275
Issed,subscribed and paid up capital 576100000 576100000 576100000 576100000 576100000
Reserve funds and other Reserves 669000000 790000000 945000000 970000000 1037000000
Profit brought forward 273007 434318 94066 614464 339307
Total Owner Equity 1245373007 1366534318 1521194066 1546714464 1613439307
Total Owner Equity and Liabilities 28639448962 28372861417 32498907390 36293868893 45201306582
229
Appendix 3.2 continued MCB balance Sheets for after privatization
1997 1998 1999 2000 2001

Assets
Cash 12801142 13559218 17669913 12571424 21259900
Balance with other banks 548,219 788,081 3603458 4,757,413 3,025,689
Money at Call and short Notice 864,470 467,655 9398536
Total Current assets 14,213,831 14,814,954 30,671,907 17,328,837 24,285,589
lending to Financial Institutions 10,852,094 15,470,519
Investment -net 58,094,728 57,980,746 45609297 43,110,947 55,432,235
Advances -net 64,365,285 62,920,478 67432574 86,359,139 76,585,999
Total Intermediate term Assets 122,460,013 120,901,224 113,041,871 140,322,180 147,488,753
Capital work in Progress 51,677 20,467 50828
Operating Fixed Assets 3,529,980 3,559,751 3479458 3,604,356 3,659,646
Other Assets 9,839,637 10,428,361 11340754 13,203,910 11,400,906
Deffered Tax Assets 255,780 220,500
Total Assets 150,095,138 149,725,757 158584818 332,366,080 187,055,394
Liabilities and Equities
Bills Payable 7,989,205 4,611,819 5292910 7,803,443 8,097,178
Borrowing from Financial
Institutions 9,789,998 7,562,164 8780541 16,890,675 8,946,624
Deposits and other Accounts 124,391,460 123,821,807 130336164 135,990,147 154,544,451
Other Liabilities 8,895,267 9072090 8,438,055 8,580,119
Total liabilities 145,308,743 144,891,057 153481705 169,122,320 180,168,372
Share holders equity
share Capital 1,820,541 1,820,541 1820541 2,202,855 2,423,140
Reserves 1,716,773 1,796,609 2092453 2,277,630 2,278,980
Unappropriate profit 387 1,136 1161 3,185 283,940
3,537,701 3,618,286 3914155 4,483,670 4,986,060
Surplus on revaluation of Assets 1248694 1,216,416 1188958 1,109,073 1,900,962
4786395 4,834,700 5,103,113 5,592,743 6,887,022
150,095,138 149,725,757 158584818 174,715,063 187,055,394
230
Appendix 3.2 continued Balance sheets for ABL before Privatizations
Assets 1986 1987 1988 1989 1990

Cash on hand 876138336 989431736 1220635306 1535541904 1788480216
Balance with other banks 909345059 1067620126 912403861 1694064913 1073291193
Money at call and short notice 11400525 67268386 50000000 nil 400000000
Total Current Assets 1796883920 2124320248 2183039167 3229606817 3261771409
Investment at cost 3101518341 5191386024 7237633698 6424756884 7268407105
Advances 5616120702 6054814297 5490507467 8087814754 11115241689
Premises 18477295 22431630 26387790 25224955 25653330
Furniture and Fixture 52344244 61598638 69652125 81576358 104992195
Other Assets 862905791 860267475 1203617884 1298241778 1542675683
Total fixed Assets 9651366373 12190498064 14027798964 15917614729 20056970002
Total Assets 11448250293 14314818312 16210838131 19147221546 23318741411
Liabilities
Deposit and other accounts 10058018097 12337440831 14571231598 16637511090 19824866983
Borrowing from other banks 254785209 373896644 422354421 694742342 1218670343
Bills payable 153967210 344105532 262506866 361060586 588109953
Other Liabilities 769329231 898006315 576403989 1056359560 1269371265
Total Liabilities 11236099747 13953449322 15832496874 18749673578 22901018544
Capital
Issued and subscribed capitals 132267725 272227725 272227725 272227725 272227725
Reserve fund and other reserve 77800000 87100000 104100000 123300000 143500000
Reserve for issue of bonus share 1992150 1992150 1992150 1992150 1992150
Profit 90671 49115 21382 28093 2992
Total Capital 212150546 361368990 378341257 397547968 417722867
Total Liabilities and capital 11448250293 14314818312 16210838131 19147221546 23318741411
231
Appendix 3.2 continued Balance sheets for ABL After privatization
1996 1997 1998 1999

ASSETS (Rs, 000) (Rs, 000) (Rs, 000) (Rs, 000)
Cash in hand and with State Bank and NBP 7,195,269 6,316,337 7,646,937 8,601,193
Balance with other banks 1,627,627 1,380,840 1,878,796 1,757,510

Money at call and short notice - 450,000 100,000 300,000
Total Investments 15,552,713 20,192,699 25,605,470 26,774,766
Total Loans and Advances (net of provisioning) 32,766,263 36,231,357 42,719,179 55,263,762
Fixed Asset 901,904 872,730 2,488,619 3,062,045
Other Assets 5,395,334 6,959,687 8,919,166 11,167,055
63,439,110 72,403,650 89,358,167 106,926,331
LIABILITIES & OWNER'S EQUITY
Total Deposits 55,896,800 63,429,709 76,541,153 93,107,291
Borrowings 4,015,193 4,914,558 6,243,517 7,144,163
Bills Payable 548,575 802,367 1,084,151 1,073,491
Other Liabilities 1,589,147 1,741,598 2,487,440 2,588,936
total liabilities 62,049,715 70,888,232 86,356,261 103,913,881
Paid up capital 950,797 1,063,156 1,063,156 1,063,156
Reserves 438,598 452,262 1,938,750 1,949,294
total owner's equity 1,389,395 1,515,418 3,001,906 3,012,450
63,439,110 72,403,650 89,358,167 106,926,331
232
3.2 continued Financial Statement of UBL
UNITED BANK LIMITED RS. In, 000
1998 1999 2000 2001 2002
Earning Assets Rs. 85979751 Rs. 105247148 Rs. 117287577 Rs. 114367602 Rs. 113187063 Rs. 147130367
Total Assets Rs.101491125 Rs. 139991644 Rs. 154716101 Rs. 160572595 Rs. 160852206 Rs. 183003466
Net Income Rs. 2690949 Rs. 507058 Rs. 667092 Rs. (7477876) Rs. 1414306
Interest Margin Rs. 1710380 Rs. 2765878 Rs. 4759680 Rs. 5060183 Rs. 5778566
EBT Rs. (6600551) Rs. 1253058 Rs.1645497 Rs. (5741086) Rs. 2731308
Provision Rs. 3996700 Rs. (840317) Rs. 1526964 Rs. 1488083 Rs. 851958
Net Charge Off Rs. 786408 Rs. 352985 Rs. 555541 Rs. 511950 Rs. 865498
Average Equity Rs. (18531434) Rs. 5531202 Rs. 5866362 Rs. 6726604 Rs. 887222 Rs. 8626252
Average
Deposit Rs. 106710654 Rs. 117718301 Rs. 127133204 Rs. 129679245 Rs. 134961054 Rs. 154914619
Total Loans Rs. 54222928 Rs. 48468324 Rs. 61238410 Rs. 74156421 Rs. 78492649 Rs. 74117401
Source: Annual Reports of UBL for 1997 to 2002.
233
Appendix 3.3 Transaction Cost of MCB
MCB before
A: privatization b Staff Cost % Transaction Cost of Allied Bank Of Pakistan
operating cost as % of Total Income/ per unit of a: ABL before privatization b: Staff Cost %
years Total Income/Revenue Revenue for Rs. 1 years t/income/Revenue operating cost as % of Total Income/ per unit of
year Total
1987 92 1 1987 24.29 s Income/Revenue Revenue for Rs. 1 years t/income/Revenue
198
1988 91 1 1988 26 6 96 1 1986 28
198
1989 91 1 1989 26.2 7 96 1 1987 29
198
1990 95 1 1990 30.24 8 97 1 1988 29.72
198
1991 95 1 1991 26.71 9 97 1 1989 27.6
199
After privatization After privatization 0 96 1 1990 29.07
1997 95 1 1997 22.49 After privatization
199
1998 95 1 1998 22.32 7 99.65 1997 24.02
199
1999 93 1 1999 27.3 8 98 1998 26.14
199
2000 92 1 2000 27.07 9 99.35 1999 23.25
200
2001 89 1 2001 24.22 0 N.A 2000 N.A
MCB before 200
privatization 1 N.A 2001 N.A
Staff Cost per
C employee No. Of Employees d Staff cost P/U of ABL before privatization
years In Rupees Per Annum Operating cost % c: Staff Cost per employee No. of employees
year
1987 49627 12845 1987 26.51 s In Rupees Per Annum
198
1988 52556 12685 1988 28.52 6
198
1989 57791 12890 1989 28.5 7 Data is not available in the reports
198
1990 76511 12904 1990 31.79 8
198
1991 80423 13031 1991 28.24 9
199
After privatization After privatization 0
1997 262810 13610 1997 23.47 After privatization
199
1998 342355 12858 1998 26.33 7
199
1999 386539 12557 1999 28.85 8
199
2000 421850 12133 2000 32.38 9 Dta is not available in the reports.
200
2001 445976 11614
Source: Calculated from annual reports for the said
2001 30.23 0
200
234
periods. 1
Appendix 3.3
Particulars of provision against Non performing Advances for after privatization of MCB
(Pakistani Rupees '000)
1997 1998 1999 2000 2001
Provision Specific General Total Total Specfic General Total Specific General Total Specific General Total
Opening Balance 4306550 4E+06 4306550 3412679 566000 3978679 3497386 566000 4063386 4054778 566000 4620778
Exchange adjustment 3482 4944 3482 90452 90452 99593 99593 -14564 -14564
Change for the Year 144000 806252 144000 1024305 1024305 1704944 1704944
Amount written off -331134 -691648 -331134 -5643 -5643 -144000 -144000 -58304 -58304
Reversal -144219 -1656 -144219 -102 -102 -422506 -422506
Intertransfer -566000 566000 503702 -503702
Closing Balance 3412679 566000 4E+06 3978679 3497386 566000 4063386 4054778 566000 4620778 6190556 62298 6252854
Provision against
Advances to bank
Advances to others 4E+06 3978679 4063386
provision for advances/loans as a percentage of total loans/advances. (Rupees,000)
1997 1998 1999 2000 2001
provison T/Advances % provison T/Advances % provison T/Advances % provison T/Advances % provison T/Advances %
4306550 6.9E+07 6.27 4E+06 6.7E+07 5.95 4E+06 7.1E+07 5.68 5E+06 9.1E+07 5.08 6252854 8.3E+07 7.55
Percentage of written off against T/advances
1997 1998 1999 2000 2001
0.48 1.03 0.008 0.16 0.07
235
Appendix 3.3 Continued Particulars of provision of non-performing advances after privatization of ABL
(Pakistani Rupees '000)

1997 1998 1999
2577429 3417099 3070768

1815 1301 2652
712492
-59949 -103244 -30275
-254985 -53131
185312 10597 -35495
3417099 3070768 2954519
3417099 3070768 2954519
provision for advances/loans as a percentage of total loans/advances.

1997 1998 1999
Provision T/Advances % Provision T/Advances % Provision T/Advances %
3417099 39648456 8.62 3070768 45789947 6.72 2954519 58218281 5.07
Percentage of write off against T/advances

1997 1998 1999
0.15 0.23 0.05
236
Appendix 3.4
Interest Risk
Measurement
Before Privatization
MCB
1987 1988 1989 1990 1991
Interest and discount or return 2247813441 2176215890 2269720109 2638307048 3192089572

Interest on deposits borrowing etc. 1452592066 1323036347 1496323415 1709808151 2114270463
Difference 795221375 853179543 773396694 928498897 1077819109
% of net interest income to T/Revenue. 35.3775523 39.204729 34.0745403 35.192981 33.7653153
After privatization
Pakistani Rupees in Millions
1997 1998 1999 2000 2001
Difference 6770462 6132742 6404043 6885562 9488328
ABL Before Privatization (In

Pakistani Rupees)
1986 1987 1988 1989 1990
Difference 335854395 389949087 411433694 416386869 551745789
After Privatization(Pakistani
Rupees in'000)
1997 1998 1999 2000 2001
Data not
Interest and discount or return 5026787 6059060 7287432 available
Interest on deposits borrowing etc. 4639053 5289971 6953006
Difference 387734 769089 334426
% of net interest income to T/Revenue. 7.71335646 12.6932065 4.58907884
237
Appendix 3.4 continued Capital Risk of MCB Before Privatization
1987 1988 1989 1990 1991

Advances 13110617022 13096086856 15548316766 2757663780 3733992169
Capital* 12739027561 3982991762 4357760821 5596211362 5907492195
% 0f total capital to T/Loans 97.16573629 30.41360221 28.02721919 202.9330552 158.2084784
Capital Risk of MCB After Privatization (Rs.In, OOO)

1997 1998 1999 2000 2001
Advances 64365285 62920478 67432576 86359139 76585999
Capital* 14576393 12396864 12693535 22483418 15833646
ABL Befor
privatization (in
Rupees)
1986 1987 1988 1989 1990
Advances 5616120702 6054814297 5490507467 8087814754 11115241689
Capital* 464943602 733273484 798703528 1092290310 1636393210
ABL after
privatization (000)
199 1998 1999
Advances 36231357 42719179 55263762
Capital* 6429976 9245423 10156613
% 0f total capital to T/Loans 17.74699192 21.6423237 18.37843215
238
Appendix 3.5 Capital adequacy ratios
MCB before Privatization
1987 1988 1989 1990 1991
Assets 36720602828 37235514464 39572596150 43590210123 55819696091
Shareholders contribution to T/Assets 12739027561 3982991762 4357760821 5596211362 5907492195
% of Shareholders to T/Assets 2.882527936 9.348629545 9.080947251 7.789235842 9.448966541
After Privatization
(000)
1997 1998 1999 2000 2001
Assets 150095138 149725757 158584818 174715063 187055394
% of Shareholders Contribution to T/Assets 10.29713853 12.07771231 12.49335335 7.770840848 11.81379159
AbL Brfore
Privatization ( In
rupees)
1986 1987 1988 1989 1990
Assets 13725521165 17495291259 21409793271 27372345626 34203739405
% of Shareholders Contribution to T/Assets 29.52083028 23.85916256 26.80568261 25.05958844 20.90190744
After
Privatazation(000)
1997 1998 1999 2000 2001
Assets 1569897 1937514 2063418
Shareholders contribution to T/Assets 6429976 9245423 10156613 data not avaialable.
% of Shareholders Contribution to T/Assets 0.244152855 0.209564668 0.20316005
239
3.5 Continued
Capital Adequacy Ratios

2000 2001 2002
Capital to Risk weighted assets
Public sector comm.banks 10.4 9.6 12.3
Domestic private banks 9.2 9.5 9.7
Foreign banks 18 18.6 23.2
specialized banks -3.3 -13.9 -31.7
All Banks 9.7 8.8 8.8
Source State bank Report for 2002
240
Liquidity
Appendix 3.5 Management
MCB befor
Privatization
a: cash as ratio of demand deposit
years 1987 1988 1989 1990 1991
Cash* 2911594683 4176609094 2835323850 4031226481 6457761511
Demand deposit 4428245822 4848430143 5745813777 6355700033 8896130809
% of cash for demand deposit 65.75052064 86.14353452 49.34590573 63.42694684 72.5906762
After
privatization
years 1997 1998 1999 2000 2001
Cash 13349361 14347299 21273371 17328837 24285589
Demand deposit 45613941 28791970 27293325 28858208 33859944
Before
b:Liquid funds/total deposits privatization
years 1987 1988 1989 1990 1991
Liquide Funds** 16220808034 16260343846 18475132958 19768408888 2.7355E+10
Total Deposit 22591537389 21899433139 25324893462 27690506893 3.5029E+10
% of total deposit to liquid funds 71.80037266 74.25006731 72.95246073 71.39056343 78.0932613
After
privatization
years 1997 1998 1999 2000 2001
241
Liquide Funds 177059310 176911444 165091754 142583756 190376686
Total Deposit 124391460 123821807 130336164 135990147 154544451
Before
c:liquid funds/total assets privatization
years 1987 1988 1989 1990 1991
Liquide Funds 16220808034 16260343846 18475132958 19768408888 2.7355E+10
Totl Asseta 36720602828 37235514464 39572596150 43590210123 5.582E+10
% of total assets to liquid assets. 44.17358863 43.66891147 46.68668411 45.35057031 49.0067295
After
privatization
years 1997 1998 1999 2000 2001
Liquide Funds 177059310 176911444 165091754 142583756 190376686
Totl Asseta 150095138 149725757 158584818 174715063 187055394
242
Liquidity
Annexure 3.5 continued. Management
ABL befor
Privatization
a: cash as ratio of demand deposit
years 1986 1987 1988 1989 1990
Cash* 1785483395 2057051862 2133239167 3229606817 2861771409
Demand deposit 2269242718 2908723717 3626813967 4412722328 5198435940
After privatization
years 1997 1998 1999
Cash* 7697177 9525733 14240438
Demand deposit 28053561 24882487 36615111
% of cash for demand deposit 27.43743299 38.2828814 38.89224315
b:Liquid funds/total deposits Before privatization

years 1986 1987 1988 1989 1990
Liquide Funds** 5831488410 2.8047E+10 20832769682 2.1864E+10 24357915814
Total Deposit 10058018097 1.2337E+10 14571231598 1.6214E+10 19824866983
After privatization
years 1997 1998 1999
Liquide Funds** 40036918 98251294 55620179
Total Deposit 63429709 76541153 93107291
% of total deposit to liquid funds 63.12013508 128.364011 59.73772666
c:liquid funds/total assets Before privatization

years 1986 1987 1988 1989 1990
Liquide Funds 5831488410 2.8047E+10 20832769682 2.1864E+10 24357915814
Totl Asseta 13725521165 1.7495E+10 21409793271 1.7742E+10 21645420203
After privatization
years 1997 1998 1999
Liquide Funds** 40036918 98251294 55620179
Data is not
Totl Asseta 72403560 89358167 106926331 available
% of total deposit to liquid funds 55.29689148 109.952226 52.01728936
243
Appendix 3.6 Earning and profitability
a:Return on assets Earning and Profitability for MCB before privatization
a: income/assets MCB before privatization

Years 1987 1988 1989 1990 1991
Income(before tax) 199358535 227012385 249621998 158860942 212724843
T.Assets 35205656741 35697001582 39572596150 43590210123 55819696091
% of income to assets 0.566268473 0.635942446 0.630795101 0.36444179 0.3810928
After privatization (Rs.000)
Years 1997 1998 1999 2000 2001
Income(before tax) 1234788 947003 1210539 1321795 2101176
T.Assets 150095138 149725757 158584818 174715063 187055394
% of income to assets 0.822670219 0.632491709 0.763338518 0.756543241 1.123290783
b:return on equity MCB before privatization

Years 1987 1988 1989 1990 1991
Income (before tax) 199358535 227012385 249621998 158860942 212724843
Capital* 12739027561 3982991762 4357760821 5596211362 5907492195
% of income to capital 1.564943117 5.699544427 5.728217042 2.838723053 3.60093312
After privatization (Rs.000)
Years 1997 1998 1999 2000 2001
Capital* 14576393 12396864 12693535 22483418 15833646
% Of income to capital 8.471149207 7.639052909 9.536657834 5.87897712 13.27032321
a: income/assets ABL before privatization
Years 1986 1987 1988 1989 1990
Assets 13725521165 17495291259 21409793271 27372345626 34203739405
ROA 0.273241668 0.263833527 0.233875528 0.19401593 0.178854418
ABL after privatization
244
Years 1997 1998 1999 2000 2001
Income (before tax) 28766 169592 71098
Continued 3.6
Assets 1569897 1937514 2063418
ROA 1.832349511 8.753072236 3.445642134
b:Return on equity ABL before privatization

years 1986 1987 1988 1989 1990
income(before tax) 37503843 46158444 50072267 53106711 61174899
Capital* 464943602 733273484 798703528 1092290310 1636393210
ROE 8.066320913 6.294847012 6.269193167 4.861959363 3.738398487
After privatization
years 1997 1998 1999 2000 2001
income(before tax) 28766 169592 71098
Capital* 6429976 9245423 10156613
ROE 0.447373365 1.834334676 0.700016826
245
Appendix 4.1 Inflows of foreign investment in Pakistan
In million
US $ As % of Total
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 Y X2 y2 XY
No. Of Deposits Investment

1982 18251389 32261.8 3.33113E+14 1040823739 5.88823E+11
1983 19565836 45033.5 3.82822E+14 2028016122 8.81118E+11
1984 20488157 38572.3 4.19765E+14 1487822327 7.90275E+11
1985 21215465 49056.1 4.50096E+14 2406500947 1.04075E+12
1986 21720814 60230.4 4.71794E+14 3627701084 1.30825E+12
1987 22578568 87273.6 5.09792E+14 7616681257 1.97051E+12
1988 23947814 85882.1 5.73498E+14 7375735100 2.05669E+12
1989 25140528 85303.9 6.32046E+14 7276755355 2.14459E+12
1990 26756571 81226.1 7.15914E+14 6597679321 2.17333E+12
1991 30993837 120021 9.60618E+14 14405040441 3.71991E+12
1992 27106754 192185.5 7.34776E+14 36935266410 5.20953E+12
1993 27973622 208043.1 7.82524E+14 43281931458 5.81972E+12
1994 29520563 267805.2 8.71464E+14 71719625147 7.90576E+12
1995 31085736 268794.3 9.66323E+14 72250375712 8.35567E+12
1996 31723719 322875.8 1.00639E+15 1.04249E+11 1.02428E+13
1997 32271603 375286.2 1.04146E+15 1.4084E+11 1.21111E+13
1998 29772355 420830.2 8.86393E+14 1.77098E+11 1.25291E+13
1999 29710720 350326.2 8.82727E+14 1.22728E+11 1.04084E+13
2000 28409347 338796.6 8.07091E+14 1.14783E+11 9.62499E+12
2001 28043818 303782.4 7.86456E+14 92283746550 8.51922E+12
Total 526277216 3733586.3 1.42151E+16 1.03003E+12 1.07401E+14
r=
∑ xy - (∑ x) (∑ y) / n
( ∑ x − ( ∑ x ) / n)( ∑ y − ( ∑ y )
2 2 2 2
/ n)
n∑ in=1 XY - ∑ in=1 X ∑ in=1 Y

β=
n∑ in=1 X 2 − (∑ in=1 X ) 2
n
n ∑ ei2
γ2=1- i =1
n 2
(∑ in = 1Yi ) 2
∑Y
i =1
i −
n
247
Appendix No 4.3
Years X (No of Deposits) Y (Investment) X2 Y2 XY

1982 18251389 32261.8
3.33113E+14 1040823739 5.88823E+11
1983 19565836 45033.5
3.82822E+14 2028016122 8.81118E+11
1984 20488157 38572.3
4.19765E+14 1487822327 7.90275E+11
1985 21215465 49056.1
4.50096E+14 2406500947 1.04075E+12
1986 21720814 60230.4
4.71794E+14 3627701084 1.30825E+12
1987 22578568 87273.6
5.09792E+14 7616681257 1.97051E+12
1988 23947814 85882.1
5.73498E+14 7375735100 2.05669E+12
1989 25140528 85303.9
6.32046E+14 7276755355 2.14459E+12
1990 26756571 81226.1
7.15914E+14 6597679321 2.17333E+12
1991 30993837 120021
9.60618E+14 14405040441 3.71991E+12
1992 27106754 192185.5
7.34776E+14 36935266410 5.20953E+12
1993 27973622 208043.1
7.82524E+14 43281931458 5.81972E+12
1994 29520563 267805.2
8.71464E+14 71719625147 7.90576E+12
1995 31085736 268794.3
9.66323E+14 72250375712 8.35567E+12
1996 31723719 322875.8
1.00639E+15 1.04249E+11 1.02428E+13
1997 32271603 375286.2
1.04146E+15 1.4084E+11 1.21111E+13
1998 29772355 420830.2
8.86393E+14 1.77098E+11 1.25291E+13
1999 29710720 350326.2
8.82727E+14 1.22728E+11 1.04084E+13
2000 28409347 338796.6
8.07091E+14 1.14783E+11 9.62499E+12
2001 28043818 303782.4
7.86456E+14 92283746550 8.51922E+12
Total 526277216 3733586.3 1.42151E+16 1.03003E+12 1.07401E+14
r=
∑ xy - (∑ x) (∑ y) / n
( ∑ x − ( ∑ x ) / n)( ∑ y − ( ∑ y )
2 2 2 2
/ n)
n∑ in=1 XY - ∑ in=1 X ∑ in=1 Y

β=
n∑ in=1 X 2 − (∑ in=1 X ) 2
n
n ∑ ei2
i =1
γ2 =1-
n 2
(∑ in = 1Yi ) 2
∑ Yi −
i =1 n
248

Privatization of Banking Sector in Pakistan: (A Case Study of MCB & ABL)

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Privatization of Banking Sector in Pakistan

(A Case Study of MCB & ABL)

Department of Public Administration

1.1 Financial Sector of Pakistan 218

ABL Allied Bank of Pakistan Limited

The economic history has witnessed waves of nationalization and privatizations,

Privatization is frequently used referring to the sale of a publicly owned enterprise

The problems of Pakistan’s banking sector were rooted in a failure of governance

The study aims to explore answers to the questions:

 Does Privatization Improve Efficiency and gives birth to New Products?

1. Description of The Study

In the sense of government executives the meaning of privatization has the

Most definitions of privatization, though, are more extensive, covering virtually

The boarder definition of privatization also includes a wide range of public-

In broad meaning, privatization refers to the transfer of functions previously

Broadly defined, privatization is the abolition of barriers to private sector

1.2: Types and Techniques of Privatization

Management Privatization means corporatization and commercialization of public

Finance privatization private funding of public infrastructure through such schemes

Deregulation through removal of regulations governing entry to, or operations

1.3: Privatization Process in Pakistan

Banking 4 5644 2 12970 1 22409 7 41023

Capital Markets 3 1300 8 8421 3 9759 14 19482

Telecom 2 30558 2 30558

Automobile 7 1102 7 1102

Cement 11 2 1048 13 8838

Chemical/fertilizer 16 9383 1 815 1 6 18 10204

Engineering 7 187 7 187

Gee Miles 21 768 81 22 849

Rice/Roti Plant 23 326 23 326

Newspapers 5 270 5 270

Tourism 3 594 1 1211 4 1805

Others 5 154 1 530 6 687

Total 121 79061 11 22211 10 35044 142 136316

Source: Privatization Commission of Pakistan

F igure 1.2: D istribu tion of P roceed s

Source: Privatization Commission Annual Report, 2003

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

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

Source: Privatization Commission Annual Report, 2003

1.4.2 Hiring of a Financial Advisor

1.4.3 Due Diligence

1.4.4 Enacting any Needed Regulatory and Sectoral Reforms

1.4.5 Valuation of Property

In order to obtain an independent assessment of the value of the property being

1.4.6 Pre-bid and Bid Process

1.4.7 Post-bid Matters

1.5 General Objectives of Privatization

(1) Reduce government subsidies to public enterprises;

Social and political objectives:

(1) Improve the welfare of the society;

1.6: Modalities of Privatization in Pakistan

1. Total Disinvestments Through Competitive Bidding.

2. Partial Disinvestments with Management Control.

1.7. Implications of Bank Privatization

Opponent of privatization dispute the claims made by proponents of the privatization,

1.8: Privatization of Banks

1.9. Privatization of Banking Sector in Pakistan

• High intermediation Costs

• Over-staffing and over-branching

• Huge portfolio of non performing loans

Does Privatization Improve Efficiency and gives birth to New Products?