Banking evolution in Pakistan

Upon independence Pakistan had neither a Central Bank nor banking system. The
Reserve Bank of India had 99 branches, of which only one was located in Pakistan,
continued to operate as a currency and banking authority for Pakistan and India
simultaneously, until June 1948. United India had 3,496 branches of scheduled banks.
However, on creation of Pakistan only 213 branches were functional in the area which
became Pakistan. The share of paid-up capital and reserves of these branches was merely
1.5 percent. The State Bank of Pakistan began operations on 1 July 1948 and became the
sole note-issuing authority. In the first eighteen months of the operation of the State Bank
of Pakistan, 52 new branches were opened in both East and West Pakistan, of which 28
were Pakistani banks, 12 were Indian, 4 were Exchange (i.e. foreign) banks, and 7 were
opened by the newly formed National Bank of Pakistan, of which 6 were in East
Pakistan. By December 1949, there were 35 scheduled banks in Pakistan. Over the years,
as the number of branches of banks began to grow, the State Bank of Pakistan decided to
set up a system of new branches under which a certain quota had to be opened in regions
designated by the State Bank. Commercial banks were asked to extend their areas of
operation to regions that were not particularly economically viable.

Banking sector has also progressed over time and played its role in the economic
development. Government has recently introduced a number of reforms in the banking
system. State bank of Pakistan has been given full authority to conduct the monetary
policy and also to oversee the affairs of the entire financial system including it’s
restructuring. State Bank has taken important steps to modernize and strengthen the
much-desired supervision of the financial system. In the beginning Pakistani banks were
less in number compared to foreign banks. In 1948, Pakistan scheduled banks numbered
4 with 23 branches only. At the same time, the number of foreign banks was 34 with 172
branches. Pakistani scheduled banks have increased to 25 and the number of their
branches was 8597 in 1997. Foreign banks currently are 21 in number with 895 branches.
The capital market also gives strong support to economic development. There have been
a number of financial institutions and stock exchanges at Karachi, Lahore and Islamabad.

Phase of Nationalization. On the first day of 1974, the Bank Nationalization Ordinance
was promulgated, according to which the federal government had exclusive rights of
ownership, management, and control of all banks in Pakistan. Of the four largest banks in
Pakistan, only one was state controlled, while industrial families such as the Habibs,
Saigols, and Admajees owned the other three. These five banks monopolized 75 per cent
of total deposits and two-third of earning assets. Fourteen banks were nationalized, of
which thirteen were merged into five banks. The State Bank of Pakistan is of the view
that ‘this was perhaps the unique case in the banking world where the Central Bank of the
country was simultaneously nationalized along with the commercial banks’. The
nationalization resulted in Political influences and lowered the banking efficiency.

Developmental Phase. It wasn’t until 1988 that a major break from the past was made
allowing new private sector commercial banks to function. In the past, the banking
system consisted of the five main nationalized commercial bank (NCB) and over two
dozen foreign-owned banks. In 1991 the government issued licenses to ten new banks in
the private sector. However, a more important development was the denationalization of
two of the five NCBs, the Muslim Commercial Bank (MCB) and the Allied Bank (ABL).
Following privatization both have significantly improved. Spurred by the success of the
privatization of these two banks, the government privatized all state-owned banks
(commercial and development banks) with the exception of the national Bank of
Pakistan.

Rescheduling of Debt

Pakistan has successfully negotiated a rescheduling of its external debt with the Paris
Club in December 2001. This has been the third rescheduling since January 1999. The
first rescheduling agreement was reached in January 1999 for its debt amounting to $ 3.0
billion. The Paris club debt rescheduling has provided substantial debt relief to Pakistan.
Pakistan has also benefited from debt rescheduling after September 11, 2001. The
structure of debt has also undergone considerable change and the interest payment as %
of GDP has declined from 6% in 1998-99 to 3.0% in 2002-03.