History of Pakistan Banking

History of Pakistan Banking Banking in Pakistan first formally started in Pakistan during the period of British colonialism in the South Asia. After independence from British Raj in 1947, and the emergence of Pakistan as a country in the globe, the scope of banking in Pakistan has been increasing and expanding continuously.

History of Pakistan Banking Pakistan's oldest bank is the State Bank of Pakistan, which is also the central bank of the nation. Before independence on August 14, 1947, the Reserve Bank of India was the central bank of what is now Pakistan. After independence, Muhammad Ali Jinnah took actions to establish a central bank in Pakistan which resulted in the new founding of the State bank of Pakistan, with its headquarters to be based in Karachi.

History of Pakistan Banking 1947 – 1970 Our financial sector evolved very differently from banks in the developed world. For nearly a year after partition, Pakistan had no central bank. Habib Bank – established in 1941 – filled this gap initially, until the State Bank of Pakistan (SBP) was set up in 1948 under quasi-government ownership.

History of Pakistan Banking 1947 – 1970 History of Banking in Pakistan starts from the partition of Indo-Pakistan sub continent in August,1947. At that time, the areas consisting Pakistan had 631 offices of 45 scheduled banks out of which 487 were located in West Pakistan and 114 in East Pakistan which Was also served by 500 office of small and non-scheduled banks. There were 19 branches of foreign banks in Pakistan but they had a very limited role to play.

History of Pakistan Banking 1947 – 1970 Just after the partition, the Indian bankers started immigrating and shifting the head offices of their banks and capital to India. It caused a great set back to the banking field in Pakistan, and resulted in decline in the number of offices in schedule bank from 631 to 195 by 30th June, 1948. The West Pakistan the number fell from 487 to 81 in East Pakistan from 144 to 69 by 30th June, 1951. Among these Habib Bank Ltd., with 25 offices and Australia Bank Ltd. with 19 offices were institutions run by Muslims who shifted their head offices to Pakistan.

History of Pakistan Banking 1947 – 1970 The technical and administrative difficulties of establishing a central bank just after independence compelled Pakistan to enter into an agreement with the Reserve Bank of India by which the bank was to perform the function of a central bank in this area also upto 30th September, 1948. The Reserve Bank of India started following wrong policies against the interest of Pakistan. The situation became so grave that after the consultation of two government the Reserve Bank of India was asked to finish the agreement from 30th June instead of from 30th September,1948.

History of Pakistan Banking 1947 – 1970 So the Government of Pakistan decided to establish the State Bank of Pakistan as its central bank from 1st July, 1948. In the same year first Pakistani notes in the denomination of Rs.5, 10, and 100 were issued and Indian currency was withdrawn from circulation.

History of Pakistan Banking 1947 – 1970 The role of domestic banks was particularly limited at the time, accounting for only 25 of the total 195 bank branches in the country. Therefore, the SBP was initially mandated to develop commercial banking channels, and maintain monetary stability so trade and commerce could flourish in the newly-created state. Subsequently, Habib Bank, Allied Bank and National Bank were amongst the first to start operations with strong support from the central bank.

History of Pakistan Banking 1947 – 1970 The State Bank of Pakistan's policy encouraged expansion in established banks, establishment of new banks, and weeding out of unsound banks just to faster the growth of banking system in the country. This policy not only established the banking system by 1965 but increased its functional efficiency, scope of operations and soundness to a great extent and the following banking structure emerged:

History of Pakistan Banking 1947 – 1970 STATE BANK OF PAKISTAN (CENTRAL BANK) COMMERCIAL BANKS. SAVING BANKS CO-OPERATIVE BANKS EXCHANGE LANES SPECIALIZED FINANCIAL INSTITUTIONS

History of Pakistan Banking 1947 – 1970 There are two types of the COMMERCIAL BANKS Scheduled Non-scheduled banks

History of Pakistan Banking 1947 – 1970 According to the State Bank of Pakistan Act,1956 a bank having a paid up capital and a reserve of rupees five lacs and fulfilling certain other requirements can be scheduled with the State Bank of Pakistan. With the opening of the State Bank of Pakistan and the keen interest which it took in the establishment of the sound banking system in Pakistan despite the separation of the East Pakistan, commercial banking made a tremendous progress which can be judged from the following figures.

History of Pakistan Banking 1947 – 1970 Offices of the following 14 banks (scheduled) increased from 195 to 1948 to 3600 with 71 branches outside Pakistan in 1972, deposits from 88 Crores in 1948 to 1900 crores in 1972 and advances from 20 crores in 1948 to 1250 crores in 1972.

History of Pakistan Banking 1947 – 1970 National Bank of Pakistan Habib Bank Ltd. Habib Bank (Overseas) Ltd. United Bank Ltd. Muslim Commercial Bank Ltd. Commerce Bank Ltd. Australasia Bank Ltd.

History of Pakistan Banking 1947 – 1970 Standard Bank Ltd. Bank of Bahawalpur Ltd.  Premier Bank Ltd.  Pak Bank Ltd.  Sarhad Bank Ltd.  Lahore Commercial Bank Ltd.  Punjab Provincial Co-operative Bank Ltd.

History of Pakistan Banking 1947 – 1975 On January 1, 1974 the Government of Pakistan nationalize all the Pakistani scheduled banks including State Bank of Pakistan, industrial Bank of Pakistan, Agricultural Development Bank of Pakistan through the bank- nationalization act, 1974 to achieve the desired objectives. The weaker commercial banks were merged with stronger ones and in all five major banking companies were formed.

History of Pakistan Banking 1947 – 1975 NATIONAL BANK OF PAKISTAN  HABIB BANK LIMITED  UNITED BANK LIMITED  MUSLIM COMMERCIAL BANK LIMITED  ALLIED BANK OF PAKISTAN 

History of Pakistan Banking 1947 – 1975 The Federal Government also set up a Pakistan Banking Council on March 21, 1974 to look after the organizational and operational matters including evaluation and progress of the nationalized commercial banks. The State Bank was to provide the overall policy guidelines to commercial banks.

History of Pakistan Banking 1970 – 1980 Commercial banking grew favourably in Pakistan until 1974. Under the nationalization policy implemented by Zulfikar Ali Bhutto’s government, thirteen banks were brought under full government control, and consolidated into six nationalized banks. The Pakistan Banking Council was set up to monitor nationalized banks, marginalising the SBP’s role as a regulator. These measures were meant to improve lending to prioritised industries. However, while directed lending was viewed favourably at the time, little can be said of the long-term gains that have been achieved.

History of Pakistan Banking 1980 – 1990 (Business as usual) Over time, the financial sector grew to serve primarily large corporate business, politicians and the government.  Board of Directors and CEOs were not independently appointed. Lending decisions were not always commercially motivated, and many billions of rupees were unsurprisingly funneled out of the financial system as “bad loans”. Banks were essentially not in control of their destinies during this period.

History of Pakistan Banking 1990 – 1997 (Privatization) By 1991, the Bank Nationalization Act was amended, and 23 banks were established – of which ten were domestically licensed. Muslim Commercial Bank was privatized in 1991 and the majority ownership of Allied Bank was transferred to its management by 1993. By 1997, there were still four major state-owned banks, but they now faced competition from 21 domestic banks and 27 foreign banks. More importantly, administered interest rates were streamlined, bank-wise credit ceilings removed and a system of auctioning government securities was established, forcing the government to borrow at market determined rates.

History of Pakistan Banking 1997 – 2006 (Ushering in the reforms) After privatization, transformational reforms were pushed through. The central bank’s regulatory powers were restored via amendments to the Banking Companies Ordinance (1962) and the State Bank of Pakistan Act (1956). Subsequently, corporate governance, internal controls and bank supervision was strengthened substantially. Legal impediments and delays in recovery of bad loans were streamlined in 2001. Furthermore, the scope of prudential framework set up in 1989 was enhanced, allowing banks to venture into hither to untapped business segments. Lending to small and medium enterprise had previously been neglected, whereas consumer and mortgage finance had not developed prior to reforms.

History of Pakistan Banking 2006 - Present (The post-reform era, ) Buoyed by the spirit of liberalization, the sector’s landscape has changed significantly. By 2010, there were five public commercial banks,25 domestic private banks, six foreign banks and four specialized banks. There are now 9,348 bank branches spread throughout the country, catering to the needs of some 28 million deposit account-holders.

Banking in Pakistan – the long journey ahead Much still remains to be accomplished. In the absence of sustainable economic growth, banks will remain vulnerable to business cycle fluctuations. As recently as 2008, non-performing loans increased sharply in response to the preceding years of easy credit and risky consumer lending practices.

Banking in Pakistan – the long journey ahead Moreover, strong regulation will continue to be required so as to maintain the delicate balance between industry concentration and competition. Presently, the top five banks account for about 50% of the sector, measured in terms of total advances.

Banking in Pakistan – the long journey ahead Finally, the benefits of financial liberalization must trickle down to the common man. Banks are proactively exploring new business models to make this happen – such as branchless banking. But more headway needs to be made before existing deployments – such as Tameer Bank’s Easypaisa or UBL Omni – reach a critical mass of users. Reforms have helped banks come a long way, but unless the central bank remains autonomous, and continues to err on the side of caution, liberalization may quickly become a bitter pill to swallow.