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IMPACT OF PRIVATIZATION OF BANKS ON PROFITABILITY

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Volume I, Issue I (2017) pp. 24-35

IMPACT OF PRIVATIZATION OF BANKS ON PROFITABILITY

Publication No. SM-17-I-III

Hassan Ali1 (Corresponding author) Dr. Ayaz ul Haq2

hassanalib22@gmail.com ashar11pk@gmail.com
MS Scholar, Capital University of Science Assistant Professor, University of Central
and Technology, Islamabad. Punjab, Rawalpindi Campus.

ABSTRACT
Many studies have already been conducted on the impact of privatization on the profitability of
banks considering data of 5-10 years before privatization and 7-17 years after privatization. Data
of recent years (i.e. last 4-5 years) has not been considered for investigation of the impact of
privatization on the profitability of banks. Therefore, this work has been conducted on the data of
4-10 years just before privatization and 10-12 years just after privatization of only two banks. All
data, used in this research, are taken from annual reports of respective banks. Thus, the used data
can be termed as secondary data. Analysis has been done by incorporating two methods; one is
manual analysis, and the other is paired sample t-tests using SPSS software. For this research, a
total of five variables (i.e. Return on Assets (ROA), Return on Equity (ROE), Total Assets (TA),
Deposits, and Investments) which measure the profitability of banks, were considered. The results
suggested that the efficiency of the banks enhanced after privatization giving uplift to their
profitability.
Keywords: Pre-Privatization, Post-Privatization, ROA, ROE, Total Assets, Investment, Deposit.

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

Introduction
Before the independence, till March 1947, Reserve Bank of India had been performing as the
central bank for the whole nation till 30th September 1948. Pakistan would have been in great danger if it
did not have access to the currency and banking. Multiple attempts have been made to stabilize the
economy. For example, initial Habib Bank performed its best to improve currency status of Pakistan.
Families under banking companies’ ordinance 1947 were given three months to improve the status of banks,
to remove any hurdle and make the withdrawal of money easier. At the time of separation, there were 75
crore rupees in cash balance which were left undivided by Indian Government. A breakthrough happened
when the Banking Companies Act was passed in December 1948, to empower the state bank to monitor
operations of banking institutions in Pakistan. Another bank was set up to create a financial institution i.e.
National Bank of Pakistan, under ordinance 1949. The banking system was reformed in May 1972;
Government nationalized State Bank of Pakistan and commercial banks as well and took them under its
observation and control.
Banks Act 1974, under the State Bank of Pakistan, was implemented on January 1, 1974. Late Mr.
Zulfiqar Ali Bhutto nationalized the fourteen financial, commercial banks. Until December 31, 1973, there
were fourteen Pakistani financial, commercial banks working in the country and some foreign branches
working effectively. Some financial institutions merged with the other banks because they were financially
weak. In previous ten years, both in the value of transaction and conditions of the number have developed
in the privatization of activity. By 1990s, annual average enhanced to about 500. The GDP of fiscal decline
was 8.5 percent in 1987-88.
An intensive literature research (through previous studies and annual reports) was done to get
information of the privatized banks in Pakistan and their profitability ratios before and after privatization.
Previous researchers used various approaches to study the impact of privatization of banks on profitability;
and methods used in the previous researches included liquidity ratios and solvency ratios; Regression
Analysis on non-performance loan, a time series model on profitability ratios, liquidity ratios, and solvency
ratios and the Data Envelopment Analysis (i.e. mean, MESE (mean estimated standard error), variance, and
standard deviation) of Input Assets. Bank efficiency was taken as a ratio of MESE; before privatization to
MESE after privatization. Also, to the best of the author’s knowledge, the data considered was up till 2010
for all of these banks.
No one has used data of recent years (i.e. last 4-5 years) to investigate the impact of privatization
on the profitability of banks. Therefore, just after privatization of only two banks HBL and UBL with the
data considered up to 2014 is the main concern of this research. No one used the recent data up to 2014 to
study profitability ratios which this research does, and then Paired sample t-tests have also been performed
using software SPSS on the collected data.

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

There is a general perception that the profitability of banks in Pakistan has increased after their
privatization. Only four banks i.e. MCB, ABL, HBL and UBL have been privatized in the history of
Pakistan. Many studies have been conducted on assessing their profitability after their privatization. Since
MCB and ABL were privatized in 1990s, thus a lot of research work has already been done on their
profitability considering data of many years i.e. 10 years before and 17 years after privatization. On the
other hand, HBL and UBL were privatized in 2004 and 2002, respectively, thus limited research is being
done on their profitability considering a limited number of years i.e. 5-8 years before and 7-8 years after
privatization. Also, to the best of author’s knowledge, the data considered was up to 2010 for all of these
banks. No one has used data of recent years (i.e. last 4-5 years) to investigate the impact of privatization on
the profitability of banks. Thus, there is a need to work on the profitability of before and after privatization
which will help in better understanding the impact of privatization on the profitability of banks in Pakistan.
In this research, the impact of privatization on profitability has been studied on data of 4-10 years
just before privatization and 10-12 years just after privatization of only two banks, with the data considered
up to 2014. The research is done by two methods, one is manual analysis, and other is paired sample t-tests
using software SPSS (Statistical Package for the Social Sciences).
The study identifies with two banks beforehand filling in as public sector banks and later on as
privatized banks. The explanation behind the choice of these two banks was the accessibility of information
for both pre and post-privatization period. In a few zones managing a banking sector as entire is taken
according to prerequisites of the study. This study depends on secondary data (published data).
Literature Review
The financial history was perceived in the waves of nationalization and privatizations, together
being protected in similar community and competence states. Theoretical illustrations can scarcely
differentiate between competence and dominance of different ownership measures (Vickers and Yarrow,
1988). "Privatization is a term which is used to protect numerous diverse elements, and is probably another
means of moving the relations among the government and the private sector" (Kay and Thompson, 1986).
It has discussed serious issues in the competency about the service businesses. The number of transactions
is the output of the banks and the labour, number of applications of credit and number of accounts is the
input of the banks (Oral & Yolalan, 1990).
The regular three years and the pre-privatization of the operating performance ratio relate three
years, 18 states and 32 industries in the value for 61 firms. The output of the post-privatization rises in both
ways economically and statistically (Megginson, Nash, & Randenborgh, 1994). The results of this study
show that the performance of improvement is reasonable (Verbrugge, Megginson, & Owens, 1999). The
average of post-privatization financial performance relates three years, and the pre-privatization of the

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

operating performance ratio relate three years, the 21 developing states in the value for 79 firms (Abid,
2003).
In the period of 1990 to 2001; the annual data of 69 banks were inspected to study the influence of
privatization on the performance. It showed that the impact of competency due to privatization of the banks
(Beck, Cull, & Jerome, 2003). In 33 banks in Taiwan, the performance of operating competency was
measured. It used the DEA method to measure competency which is affected by loan services, portfolio
investment, and interest income and non-interest income. The proportional position of several types of input
and output methods was used for the financial ratio analysis (Chen & Yeh, 1998).
In the banking sector, competency is the main concern of both the instructors and the bank
executives. The study requires exploring the competency of financial institutions, finding out the factors
that contribute to the competency of the financial system and to recommend the means to reach the peer
group of competency levels (Hanif, 2002). A study explored 68 Indian banks and analyzed the association
between strategic groups and firm performance in terms of competency. It used financial variables as output
as well as the input of the banks (Mukherjee & Nath, 2002). The study explored 48 Croatian commercial
banks using the DEA method to find out the competency. It used the three inputs like fixed assets and
software, number of employees and deposits and two outputs like loans extended and short-term securities
(Jemric & Vujcic, 2002). The experiential results suggest a strong competitive financial market for the
accomplished market participants that to lead the competency of the organizations and progress the
performance and output. Sometimes these tests approved the effects of liberalization and deregulation of
financial institutions on competency and efficiency of the banking sector (Berger, Hunter, & time, 1993).
Most of the time, it required banks to be efficient after the liberalization of the seventies in the United States
(Elyasiani & Mehdian, 1990).
In banking sector of Turkey, the lapse of efficiency after financial liberalization has been reported.
The state-owned banks are better than private and foreign banks (Denizer, 2000). Hardy and Patti found
some competency improvements in Pakistan (Hardy & Patti, 2001). It is widely debated in economic
literature that monetary markets play an important part in the financial growth and progress (Gertler, 1988;
Levine, 1997). It is recently proven that the findings of empirical literature function better in monetary
structures which play an important role in economic progress (Levine & Zervos, 1998; Levine, Loayza, &
Beck, 1999). The data was collected in 92 states, and the results showed that the output of the monetary
system increases with growth rate and economic growth rate in the impact of government possession. It
was found that the government possession is wide, especially in poor states and it delays the monetary
structure progress, and controls the financial growth rates thus frequently influences the efficiency (LaPorta,
Silanes, & Shleifer, 2000a).

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Advanced banking plays a vital role in the recent commerce; it is compulsory for the financial
progress (Rajan & Zingales, 1998). Main current papers in this literature are written by Kunt and
Maksimovic (1998). This literature is mostly included in a sequence of articles by Porta and Silanes (1999).
In the 1980s and 1990s, the advanced states like UK and Spain played their role in contribution in the
economy from one high state to another low state (Winston, 1998).

Finally, the hypothesis is developed to check whether there is any relationship between the
variables or not. There are two hypotheses; one is a null hypothesis (Ho) and other is an alternative
hypothesis (H1). These hypotheses are defined for the considered five variables as follows:

Ho: (ROA)b < (ROA)a

1
H1: (ROA)b > (ROA)a

Ho: (ROE)b < (ROE)a

2
H1: (ROE)b > (ROE)a

Ho: (TA)b < (TA)a

3
H1: (TA)b > (TA)a

Ho: (Deposits)b < (Deposits)a

4
H1: (Deposits)b > (Deposits)a

Ho: (Investments)b < (Investments)a

5
H1: (Investments)b > (Investments)a

Methodology

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The sample consists of two of the four banks. The reason for taking two banks is that the data
considered just after privatization was 6-8 years only. The central issue addressed is the impact of
privatization on profitability ratios of two banks. For Bank 1, data of 10 years before and 10 years after
privatization up to 2014 is considered. For Bank 2, data of 4 years before and 12 years after privatization
up to 2014 is considered. The reason for using only 4 years data before privatization of bank 2 is the
unavailability of previous years’ data. All data, used in this research, is taken from annual reports of
respective banks, thus used data is secondary data. It may be noted that some of the data from annual reports
are not matching with the data of previous researches.
The collected data has been analyzed in a tabular form for ROA and ROE as described in this
section of the years considered just before and after the privatization of Bank 1 and Bank 2, whereas, Total
Assets, Deposits, and Investment have also been compiled in the same table. Paired sample t-tests have also
been performed using software SPSS on the collected data for ROA, ROE, Total Assets, Deposits, and
Investments for the considered years just before and after the privatization of Bank 1 and Bank 2. Firstly,
paired sample statistics were performed in which mean, standard deviation and standard error mean were
determined. Secondly, paired differences were taken for mean, standard deviation and standard error mean
along with degrees of freedom (df) to get values of t and Sig (2-tailed). It may be noted that 10 years data
of Bank 1 just before and after privatization was available. But, for Bank 2, only 4 years data just before
privatization was available whereas 12 years’ data after privatization was available. In order to perform a
paired sample t-test on data of Bank 2, dummy values of 4-12 years data before privatization were taken.
Results and Discussion
Results and Discussion of Manual Analysis
For Bank 1
The Profitability ratios of Bank 1 from 1994-2014 are shown in Table 1. The overall results of ROE
show that its trend is growing in a slow manner. The ROA fluctuation in these years is both upward and
downward but ultimately, has the upward trend after privatization. The results of the total assets show that
they are moderate in nature as it was decreasing before privatization years and then increased after
privatization years.
The deposits have a decreasing trend with a flatter slope, but in post-privatization, the trend has
rapidly increased, and its positive value shows a relatively better efficiency. The result of investment also
shows that it is increasing. So, it shows an increasing trend with a flatter slope, which shows a relatively
better efficiency.

Table 1: Profitability Ratios of Bank 1

Years ROA ROE TOTAL ASSETS DEPOSITS INVESTMENTS

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

1994 0.0822 2.5082 214052 178647 64874

1995 0.1546 4.8121 230336 194661 63148
1996 -1.3870 -86.7844 248094 215395 60929
1997 -2.7120 -342.3251 520807 211383 55445
1998 0.5247 11.5560 289862 237964 70677
1999 -2.8996 -195.8398 305217 250858 64278
2000 0.1500 3.9333 328605 266052 68069
2001 0.3332 11.7028 333751 283445 57792
2002 0.5047 16.5716 403012 328182 142878
2003 0.9238 17.1088 434932 360648 158871
2004 1.1816 24.9446 487765333 404629059 134522944
2005 1.8239 29.4810 528893905 432545165 107384470
2006 2.1369 28.0245 590291468 459140198 119587476
2007 1.2261 15.8478 655838856 508986541 171932281
2008 1.2189 17.1957 749806715 597090545 129833446
2009 1.2014 17.8359 863778621 682750079 216467532
2010 1.1922 19.6154 924699403 747374799 254909116
2011 1.1898 22.3002 1139554205 933631525 418604147
2012 1.1683 18.7823 1610308572 1214963700 797094548
2013 1.1325 17.6271 1715271378 1401229814 826062308
2014 1.0143 21.6070 1867003389 1524537786 924307285

For Bank 2
The Profitability ratios of Bank 2 from 1998-2014 are shown in Table 2. The overall results of ROE
show that its trend is growing in a slow manner. The ROA fluctuation in these years is both upward and
downward but ultimately has an upward trend after privatization. The results of the total assets show that
they are moderate in nature as it was decreasing before privatization years and then increased after
privatization years. The deposits have a decreasing trend with a flatter slope in post-privatization, there is
a rapid increase and has positive values which show a relatively better efficiency. The result of investment
also shows that it is increasing. So, it shows an increasing trend with a flatter slope, which shows a relatively
better efficiency.
Table 2: Profitability Ratios of Bank 2
Years ROA ROE TOTAL ASSETS DEPOSITS INVESTMENTS
1998 1.5828 37.6900 13999000 117718000 47955000
1999 2.2336 6.3000 154450000 127133000 44954000
2000 0.4128 7.5770 16573 128679 34069
2001 -4.6489 -604.5271 160852 134961 30324
2002 0.7625 16.7802 191821032 162726468 67365288
2003 1.2502 27.2339 225387212 189832444 54587665
2004 1.3536 25.9107 282248338 237054440 52707729
2005 1.7141 31.7176 347048951 289226299 63026944

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

2006 2.2366 34.8049 423320207 335077873 67260338

2007 1.5850 24.7067 530124331 400974539 115585646
2008 1.3772 19.7361 605072482 483560062 116328288
2009 1.3333 17.5848 619716433 492036103 136145524
2010 1.2870 18.5440 698784979 550645767 224578556
2011 1.2320 21.9471 778059741 612980139 294410661
2012 1.1956 22.7332 896534595 698429697 349590182
2013 1.1734 21.0190 1009738651 827847738 423777250
2014 1.1131 23.1840 1111414107 895083053 497334002

Results and Discussion of Paired Sample t-tests

For Bank 1
Paired sample statistics of Bank 1 are shown in Table 3. There is 20 years’ data of Bank 1 from
1994-2014, in which pre-privatization is era is 1994-2003, and post-privatization is 2005-2014. The total
number of years is twenty, and the mean, standard deviation and the standard error mean of the Bank 1 are
given. The profitability ratios of the mean, standard deviation and the standard error mean of the pre-
privatization of the bank is lesser as compared to the post-privatization of the bank, which means that after
privatization, it has become more efficient as compared to that of before privatization, according to the
given sampling. This shows that investment after privatization is higher than before; privatization is fruitful
if we compare investment ratios.

Table 3: Paired Sample Statistics of Bank 1

Mean N Std. Deviation Std. Error Mean
(ROA)b -.43 10 1.389 .44
Pair 1
(ROA)a 1.33 10 .356 .11

(ROE)b -55.68 10 121.54 38.44

Pair 2
(ROE)a 20.83 10 4.62 1.46

(TA)b 330866.80 10 97221.39 30744.10

Pair 3
(TA)a 1064544651.20 10 495386704.25 156655030.80

(Deposits)b 252723.50 10 58352.85 18452.79

Pair 4
(Deposits)a 850225015.20 10 400672424.29 126703745.64

(Investments)b 80696.10 10 37444.05 11840.85

Pair 5
(Investments)a 396618260.90 10 326315877.46 103190140.94

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

Paired sample t-test of Bank 1 is shown in Table 4. The total number of years is twenty. The ROA
of the pre and post-privatization is significant that is .003, which supports Ho hypothesis because p<0.05 is
acceptable. The ROE of the pre and post-privatization is significant, that is .044, which supports Ho
hypothesis because p<0.05 is acceptable. The total asset of the pre and post-privatization is significant, that
is .000, which supports Ho hypothesis because p<0.05 is acceptable. The deposit of the pre and post-
privatization is significant, that is .000, which supports Ho hypothesis because p<0.05 is acceptable. The
investment of the pre and post-privatization is significant, that is .004, which supports Ho hypothesis
because p<0.05 is acceptable. The mean difference, overall, of pre-privatization is not better as compared
to post-privatization, which means that the post-privatization period is more efficient as compared to pre-
privatization according to the given sampling.

Table 4: Paired Sample t-Test of Bank 1

Paired Differences
95% Confidence Interval of the Sig. (2-
Std. Std. Error t df
Mean Difference tailed)
Deviation Mean
Lower Upper
Pair 1 (ROA)b – (ROA)a -1.76 1.40 .44 -2.76175 -.76 -3.993 9 .003
Pair 2 (ROE)b – (ROE)a -76.51 119.90 37.92 -162.28072 9.27 -2.018 9 .044
Pair 3 (TA)b – (TA)a -1064213784.40 495335578.04 156638863.27 -1418555510.93 -709872057.87 -6.794 9 .000
(Deposits)b –
Pair 4 -849972291.70 400615247.29 126685664.68 -1136555175.48 -563389407.92 -6.709 9 .000
(Deposits)a
(Investments)b –
Pair 5 -396537564.80 326287530.69 103181176.91 -629949603.21 -163125526.39 -3.843 9 .004
(Investments)a

For Bank 2
Paired sample statistics of Bank 2 are shown in Table 5. In the table, there is 12 years data’ of Bank
2 from 1998-2014, in which pre-privatization era is 1998-2002 and post-privatization era is 2003-2014. The
total number of years is 12 and the mean, standard deviation and the standard error mean of the Bank 2 is
given. The profitability ratios of the mean, standard deviation and the standard error mean of the pre-
privatization of the bank is less as compared to post-privatization of the bank, which means that after the
privatization, the performance of the bank is more efficient as compared to that of before privatization,
according to the given sampling. It shows that investment after privatization is higher than before, which
means that privatization is fruitful if we compare investment ratios.
Table 5: Paired Sample Statistics of Bank 2
Mean N Std. Deviation Std. Error Mean
(ROA)b -.04 12 1.63 .47
Pair 1
(ROA)a 1.40 12 .31 .09

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

(ROE)b -46.08 12 176.19 50.86

Pair 2
(ROE)a 24.09 12 5.18 1.50

(TA)b 14052202.08 12 44396179.25 12816073.02

Pair 3
(TA)a 627287502.25 12 284715054.70 82190156.74

(Deposits)b 20426220.00 12 47686091.38 13765788.85

Pair 4
(Deposits)a 501062346.17 12 226710456.86 65445671.65

(Investments)b 7747782.75 12 18091204.72 5222480.96

Pair 5
(Investments)a 199611065.42 12 156030877.15 45042234.46

Paired sample t-test of Bank 2 is shown in Table 6. The total number of years is 12. The ROA of
the pre and post-privatization is significant, that is .011, which supports Ho hypothesis because p<0.05 is
acceptable. The ROE of the pre and post-privatization is significant, that is .035, which supports Ho
hypothesis because p<0.05 is acceptable. The total asset of the pre and post-privatization is significant, that
is .000, which supports Ho hypothesis because p<0.05 is acceptable. The deposit of the pre and post-
privatization is significant, that is .000, which supports Ho hypothesis because p<0.05 is acceptable. The
investment of the pre and post-privatization is significant, that is .001, which supports Ho hypothesis
because p<0.05 is acceptable. The mean difference of the overall is pre-privatization is not better as
compared to post-privatization, which means that the post-privatization period is more efficient as
compared to pre-privatization period, according to the given sampling.

Table 6: Paired Sample t-Test of Bank 2

Paired Differences
95% Confidence Interval of the Sig. (2-
Std. Std. Error t df
Mean Difference tailed)
Deviation Mean
Lower Upper
Pair 1 (ROA)b – (ROA)a -1.44 1.63 .47 -2.48 -.40 -3.055 11 .011
Pair 2 (ROE)b – (ROE)a -70.17 176.04 50.82 -182.03 41.68 -1.381 11 .035
Pair 3 (TA)b – (TA)a -613235300.17 273995743.81 79095758.22 -787323890.24 -439146710.10 -7.753 11 .000
(Deposits)b –
Pair 4 -480636126.17 216094213.50 62381026.17 -617935839.03 -343336413.30 -7.705 11 .000
(Deposits)a
(Investments)b –
Pair 5 -191863282.67 150391098.40 43414170.57 -287417227.84 -96309337.50 -4.419 11 .001
(Investments)a

Conclusion
In the history of Pakistan, only a total of four banks (HBL, UBL, MCB, and ABL) have been
privatized; and a lot of work has already been done to explore the impact of privatization considering
profitability of these banks; but the current work was based on data of 5-10 years before and 7-17 years
after privatization. Also, to the best of the author’s knowledge, the data considered was up to 2010 for all
of these banks. No one has used the data of the recent years (i.e. last 4-5 years) to investigate the impact of

33
SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

privatization on the profitability of banks. Therefore, to get in-depth knowledge, this work has been
conducted on data of 4-10 years just before privatization and 10-12 years just after privatization of only
two banks, with the data considered up to 2014. Analysis has been done using two methods; one is manual
analysis (i.e. ratio analysis), and other is paired sample t-tests using software SPSS. On an overall basis, it
can be concluded that there is a better effect on the profitability of the considered banks after their
privatization. These study results show that there is a significant difference in profitability between before
privatization and post-privatization.
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