Chapter 05

Commercial banks
 Commercial Banks
Commercial banks are companies “which transact the
business of banking in Pakistan”
The companies operate under “the Banking Companies
Ordinance 1962”
Section 5(b) says, “ Banking means the accepting, for the
purpose of lending or investment, of deposits of money from
the public, repayable on demand or otherwise, and withdraw
able by cheques, drafts, order or otherwise”
• Section 8, makes it obligatory that every banking
company or its subsidiary use the word “bank” as part of
its name.
 Commercial Banks
Among all financial institutions commercial banks
are:
 largest deposit institution
 Main source of short term credit
 An important source of institutional credit in the
economy of Pakistan
• Schedule Bank: Section 37 (2a) of SBP Act, 1956 that
the bank having a paid up capital & reserve of Rs. 500
million or more and fulfilling certain other
requirements may be declared as :schedule bank”.
 Core Functions/Services of
Commercial Banks
BCO, 1962 permits commercial banks to engage in
following forms of business:
Core function:
1. Borrowing, raising or taking up of money
2. The lending or advancing of money either upon or
without security
 Other Function/Services of Commercial
Banks

Other functions:
1. Banker acting as an Agent: Bankers make payment & receive money on
behalf of any Government or local authority or any person/(s) through
following ways:
Receive & pay cheques
Collection of dividend & interest on securities on behalf of customer after obtaining
power of attorney
Collection of pension, rents & salaries
Payment of interest, loan installments, insurance premium, membership subscription
of clubs, libraries & professional association, rent & salaries
Keeping valuables in safe custody & providing safe deposit vault
Transfer of funds
Purchase & sale of foreign exchange
Sale and purchase of securities (shares, debentures, bonds & investments of all kinds)
 Other Function/Services of
Commercial Banks
 The drawing, making, accepting, discounting, buying, selling,
collecting & dealing in (bills of exchange, promissory notes, coupons,
drafts, bills of lading, railway receipts, warrants, debenture certificates,
participation term certificate, term finance certificate, Musharika
certificates, Modaraba certificates & other instruments as may be
approved by SBP
2. Banker as a Trustee: A client directs his bank to act as a trustee in the
will after his death. He may create a trust under his will, directing a bank to
administer the property held in a trust to benefit various beneficiaries .
3. Banker as an Executor: A client directs his bank to administer his
will expressing his intention regarding the disposal of his property to beneficiaries
and charges a small fee for providing this essential service.
 Other Function/Services of
Commercial Banks
4. Issuing guarantee and carrying on indemnity
business: Indemnities & guarantees are used by the
borrower to protect themselves from the risk of debt
defaults
Bank Guarantee: is an agreement between three parties. Bank, applicant
and beneficiary. It is promise from a lending institution that ensures the
bank will step up if a debtor cannot cover debt. It is a security of creditor
Bank Indemnity: It is a financial contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person. It is the reimbursement of
loss.
 Other Function/Services of
Commercial Banks
5. General utility services
6. Underwriting of loans raised by the government or
public bodies & trading by corporation.
7. Providing specialized services to customers e.g.
International trade financing
8. Helping the hajj pilgrims in submission of their hajj
applications
 Banking in Pakistan
June 30, 1948: only two 02 Pakistani banks were
operational
 Habib Bank ltd
 Australasia Bank (renamed as Allied Bank of Pakistan in 1974)

• Till December 31, 1973: 14 scheduled Pakistani

commercial banks
• January 01, 1974: The government of Pakistan decided
to nationalize the Pakistani Schedule Banks and
promulgated the “Banks Nationalization Act, 1974”
 Nationalization of Banks
Pakistani schedule banks were nationalized with the
following main objectives:
1. To enable the government to use the capital
concentrated in the hands of few rich bankers for
economic development & urgent social welfare projects.
2. To distribute equitably bank credit to different classes,
sectors and regions
3. To coordinate the banking policy in various areas of
feasible joint activity without eliminating healthy
competition among banks
 Reorganization of Nationalized Banks
In accordance with Banks Nationalization Act, 1974, the
Pakistan Banking Council was setup to nationalize
commercial banks.
The stronger and bigger banks were merged with small &
weak banks
Under the notification of Banks (Amalgamation) scheme,
1974 following five units were formed in three phases.
1. National Bank of Pakistan 5. Allied Bank of Pakistan
2. Habib Bank Limited Limited
3. United Bank Limited
4. Muslim Commercial Bank Limited
 Reorganization of Nationalized Banks
First Phase completed on 30th June, 1974
Second phase completed on 31st December, 1974
Third phase completed on 30th June, 1975

Pakistan Banking Council & its Dissolution

• PBC was set up to nationalize commercial banks
• In Februrary, 1997 the Banks (Nationalization)
(Amendment) Ordinance, 1997 was promulgated to
dissolve PBC.
 Pakistan Banking Council & its Dissolution

The functions of council were transferred to SBP

Many professionals felt that in presence of an
independent & strong central bank it was unnecessary
to have an additional institution like PBC
The dissolution of PBC was a significant step in
making banking free from lot of unnecessary
regulatory control.
 Effects of Nationalization
Positive effects
Nationalized Banks had efficient professional management
Expansion in the number of branches all over country
The rapid pace of deposit mobilization enabled to lay full emphasis
on lending policies
The financing to priority sector like agriculture, small business,
industry & low cost housing increased.
The target for agriculture finance exceeded many times as SBP
introduced Small Loans Scheme in 1972
The number of foreign branches of Pakistani banks recorded a big
increase thus foreign exchange increased
 Effects of Nationalization
Negative effect: There was an unprecedented profits in banking upto
1980, but thereafter
The standard of banking service across and off the counter
deteriorated
Overstaffing & high salary packages resulting in high operational cost
Political intervention in credit allocation and loan recovery increased
bad debts
Unionism of employees & banks
Production, trade & commerce was over regulated & dominated by
public sector
Chronic budget deficit, leaving not much for physical and social
infrastructure
Privatization & Disinvestment of Banks
In 1990, the government of Pakistan introduced
comprehensive economic reforms aimed at
liberalization & deregulation of trade, commerce,
industry, banking & finance
Banks (Nationalization) (Second Amendment)
Ordinance, 1991 paved the way for privatization of
banking in Pakistan
Various governing laws were amended
Strict criteria for selection of good entrepreneur as
investor was drawn
Privatization & Disinvestment of Banks
Government of Pakistan divested two banks in 1991
 Muslim Commercial Bank, the first bank to be
privatized
 Allied Bank was the second bank to be privatized
through Employee Stock Option Plan
 Then UBL and HBL were privatized in phases
Employee Stock Option Plan: which give employees the right or option
to buy their company’s stock at a set price or discounted price after a
vesting period. Vesting period is a time an employee must work for an
employer in order to own outright employee stock options, shares of company
stock or employer contributions to a tax-advantaged retirement plan.
 Foreign/Exchange banks
Bank branches having their head offices abroad are
known as “Exchange Banks”
These banks traditionally finance foreign trade mainly,
yet they also play an important role in financing the
country’s internal trade
Financing of import, export, stock exchange securities
and installment credit like credit card & charge card
Foreign banks being selective & expensive have
remained concentrated in port towns and important
trade centers.
 Cooperative Banks
The cooperative movement started in Indo Pakistan
subcontinent toward the close of 19th century
Earlier cooperative movement was restricted solely to
provide credit to farmers to save them from paralyzing
grip of village money lenders
The aim of cooperative movement was the promotion
of thrift, self help and mutual aid amongst
agriculturists, artisans and people of limited means
Attempts had been made to reform the cooperative
banking from time to time
 Cooperative Banks
Last attempt was the establishment of Federal bank of
cooperatives after the government promulgated the
Federal Bank for Cooperative Act, 1976
This bank also failed and later on merged with “Zarai
Taraqiati Bank Ltd.” in 2005