History of Pakistan Banking
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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.
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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.
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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 quasigovernment ownership.
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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.
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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.
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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.
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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.
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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.
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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:
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History of Pakistan Banking
1947 – 1970
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STATE BANK OF PAKISTAN (CENTRAL BANK)
COMMERCIAL BANKS.
SAVING BANKS
CO-OPERATIVE BANKS
EXCHANGE LANES
SPECIALIZED FINANCIAL INSTITUTIONS
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History of Pakistan Banking
1947 – 1970
• There are two types of the COMMERCIAL
BANKS
1. Scheduled
2. Non-scheduled banks
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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.
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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.
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History of Pakistan Banking
1947 – 1970
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•
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National Bank of Pakistan
Habib Bank Ltd.
Habib Bank (Overseas) Ltd.
United Bank Ltd.
Muslim Commercial Bank Ltd.
Commerce Bank Ltd.
Australasia Bank Ltd.
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History of Pakistan Banking
1947 – 1970
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•
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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.
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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.
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History of Pakistan Banking
1947 – 1975
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NATIONAL BANK OF PAKISTAN
HABIB BANK LIMITED
UNITED BANK LIMITED
MUSLIM COMMERCIAL BANK LIMITED
ALLIED BANK OF PAKISTAN
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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