Economy of

Pakistan
Week 9 Reading Material
Development of Banking Sector in Pakistan
A. Development of Banking Sector in Pakistan

Banking in Pakistan first formally started 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 has
been increasing and expanding continuously.

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.

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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.

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.

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a. 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. There were 19 branches of foreign
banks in Pakistan but they had a very limited role to play.

Just after the partition, the Indian bankers started immigration 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 of scheduled banks
from 631 to 195 by 30th June, 1948.
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In the West Pakistan, the number fell from 487 to 81 and in East
Pakistan from 144 to 69 by 30th June, 1951. Among these Habib
Bank Limited with 25 offices and Australia Bank Limited with 19
offices were institutions run by Muslims who shifted their head
offices to Pakistan.

The technical and administrative difficulties of establishing a

central bank just after the independence compelled Pakistan to
enter into an agreement with the Reserve Bank of India by which
the bank was to perform function of a central bank in this area
also up to 30th September 1948.

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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 Governments the Reserve bank
of India was asked to finish the agreement from 30th June instead
of 30th September, 1948.

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 withdraw from
circulation.

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Subsequently, Habib Bank, Allied Bank and National Bank were
amongst the first to start operations with strong support from the
central bank.

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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• State Bank of Pakistan (central bank)
• Commercial banks
• Saving banks
• Co-operative banks
• Exchange lanes
• Specialized financial institutions

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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:

Offices of the following 14 scheduled banks increased from 195

(in 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.

National bank of Pakistan

Habib Bank Limited

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Habib Bank (Overseas) Ltd.
United Bank Ltd.
Muslim Commercial Bank Ltd.
Commerce Bank Ltd.
Australasia Bank Ltd.
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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b. 1970-1975

On January 1, 1974 the Government of Pakistan nationalize all

the Pakistani Scheduled Banks 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.

National Bank of Pakistan

Habib Bank Ltd.
United Bank Ltd.
Muslim commercial Bank Ltd.
Allied Bank Ltd.

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The Federal Government also setup 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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c. 1970-1980

Commercial banking grew favorably in Pakistan until 1974. Under the

nationalization policy implemented by Zulfiqar Ali Bhutto’s
Government, thirteen banks were brought under full Government
control, and consolidated into six nationalized banks.

d. 1980-1990

Over time, the financial sector grew to serve primarily large corporate
businesses, 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 surprisingly 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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e. 1990-1997

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.

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f. 1997- 2006 (ushering 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 were 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 enterprises had
previously been neglected, whereas consumer and mortgage
finance had not developed prior to reforms.
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g. 2006-Present

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, 6 foreign banks and 4 specialized banks. There are
now more than 10,000 bank branches spread throughout the
country.

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h. Branchless Banking (future of banking system in Pakistan)

E-Banking
Mobile Banking

E-Banking

The electronic banking system operations are performed through the internet and
finances are under control at all times. From customer’s point of view, E-banking
means 24-hours access to cash through an ATM (Automated Teller Machine).

Electronic banking is the major product of electronic commerce that facilitates

the large number of customers in very short time.

Customers use e-banking to get information of all types of transaction in secure

environment by using the bank’s website. Electronic banking is the success of
technology, which made too easy the life of people. Now a day’s electronic
banking is the back bone of every bank, especially in Pakistan.

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Mobile Banking

Pakistan is now one of the countries with incredible growth in the

market of branch-less & mobile banking.

The branch-less & mobile-banking is penetrating at quicker pace

throughout the country and no doubt there is a lot of potential.
Major players of banking and cellular phone are entering into this
financial sector.

Customers are progressively utilizing the transaction services for

money transfer, utility payments, bank accounts and home
remittances through different companies led by banks or mobile
operators.

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